Highly Indebted Laos Opens $6B Rail Link To China

Laos opened a new $6 billion rail link with China to much fanfare this month, but analysts warn the party could be short-lived as the government grapples with a potential debt crisis.

Photo Insert: The China-Laos Railway

The line will connect the capital Vientiane with the southern Chinese city of Kunming, and there are grand plans for a high-speed rail network running to Singapore through Thailand and Malaysia, Lisa Martin and Pathom Sangwongwanich reported for the Agence France-Presse (AFP).

Laos President Thongloun Sisoulith at the opening heralded a "new era of modern infrastructure development" for the impoverished country, adding that "the dreams of Lao people have come true." The government hopes the railway will turn a profit by 2027, but analysts are concerned about the unsustainable Chinese loans to pay for this and other projects.

With a small market, there is "limited commercial logic for an expensive railway" to connect the country of seven million to Kunming, said Jonathan Andrew Lane in an Asian Development Bank Institute report. His analysis found that potential benefits to Laos do not appear to outweigh the risks. "That debt service will put further strain on the limited tax-raising abilities of the government," Lane wrote.

As of early 2021, Laos was "on the brink of sovereign default and urgently seeking debt relief from their Chinese creditors," AidData, a research unit of the College of William and Mary, said.

But China is often reluctant to cancel BRI debts, instead offering deferrals -- sometimes with higher interest rates -- or rescheduled payment plans. In September, Laos sold its electricity transmission grid to a Chinese state-owned enterprise for $600 million, an apparent debt-for-equity swap, according to researchers. Fitch said in August that further national assets sales are expected.

This trend has been seen in other Asian nations shouldering high Chinese debt. One of the most prominent cases was Beijing's 2017 takeover of Sri Lanka's Hambantota port after the country was unable to repay a huge loan.

AidData said in September that BRI had saddled poor nations with "hidden debt" worth $385 billion, and more than a third of its projects were hit by alleged corruption and protests.

But while the outside world mulls whether China is taking over Laos, the Lowy Institute's Ben Bland said the impoverished state has little choice in its search for partners to grow its economy. "What is the alternative? It doesn't seem that other foreign investment and development partners are eager to supplant China," he told AFP.

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