It looks like Laos, China’s tiny landlocked southern neighbour, is about to find out whether sharing a border with China is a good thing. Laos has two things China needs – natural resources such as potash and hydropower, and access to Thailand’s large and growing consumer market.
Perhaps that is why China is so keen to provide a $7.2bn loan to the small communist country for a long-awaited controversial high-speed rail project between the two.
This month, Laos’s ruling politburo started the process of negotiating the terms of the loan – equal to almost 90 per cent of the country’s $8.3bn gross domestic product.
The Laos government considers the rail project an essential part of the country’s economic development, although the politburo’s decision-making process is opaque. The government decided to bear the full cost of the project after Beijing pulled out of a joint-ownership proposal. At the end of 2010, when the rail link was first discussed, Somsavat Lengsavad, deputy prime minister, told international media: “we believe this project should contribute significantly to the socioeconomic development of Laos, as well as to the promotion of economic cooperation between [southeast Asia] and China.”
If current negotiations are successful, the 420km (261-mile) rail link will connect Kunming in southern China and Laos’s capital Vientiane, just across the Mekong river from Thailand. This is great news for Chinese companies operating in Laos. It would also mark an extraordinary advance for Laos’s rail network, which at present is only 3.5km long and runs from the outskirts of the capital across the Thai border.
However, no discussion has publicly taken place about how to make the rail link affordable to Laos’s 6.2m people, about two thirds of whom live in rural areas and, on average, have a yearly income of just $1,130, according to the World Bank.
Some experts, citing the Asian Development Bank and IMF, have said that Laos may not be able to bear the cost of the project, which will be initially funded by a loan from China’s Export-Import Bank. The New York Times reported that a consultant for the United Nations Development Programme said the terms of the loan would put Laos’s “macroeconomic stability in danger” and would be “an expensive mistake”.
For China, the risks of a default are mitigated by the great benefits the rail link will provide to Chinese companies, which invested around $3.3bn in Laos in 2012. Their operations in Laos currently rely on slow and expensive transport of goods and people along the country’s potholed and ageing road network. Chinese companies are investing heavily in Laos, particularly in mining, hydropower and timber, driving economic growth at around 8 per cent. China was Laos’s second largest trading partner after Thailand in 2011, with 16.1 per cent of trade, worth €941.6m ($1.2bn), according to European Union statistics.
But a high-speed rail link through Laos is not only important to China for facilitating cross-border trade. It is more about linking China with lucrative markets such as Thailand. A recent announcement from the Thai prime minister confirmed that Thailand’s previous plans to connect Bangkok with Vientiane by high-speed rail will go ahead as part of a Bt2.2tn ($75bn) infrastructure spending boom between now and 2020.
Such a link would not only give China direct access to Thailand’s fast-growing consumer market but also provide an onward link to the multi-billion dollar Dawei deep-sea port project on Myanmar’s coastline. Thai plans for rail and road links to Dawei would allow China to minimise its reliance on shipping around the Malaysian peninsular and through the Strait of Malacca, effectively giving China a western seaboard.
Nor is Dawei the only such project. A similar Chinese-led venture at Kyaukphyu is already under way, accompanied by a gas pipeline connecting the lucrative Bay of Bengal with southwest China. A preliminary agreement has already been signed to build a rail link and highway between Kyaukphyu and Kunming.
The diplomatic consequences of China’s high-speed rail and trade expansion into southeast Asia have not escaped the notice of the US. Indeed, in 2012, the then-secretary of state Hillary Clinton visited Laos – the first top US diplomat to do so in 57 years. Whether or not the US “pivot” to southeast Asia is successful, there is no doubt that China is well out ahead, on a track that seems likely to reorder the economic and diplomatic balance in the region.
