Laos in debt crisis after joint venture with China

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analysis

Laos has built the Laos-China Railway, a joint venture with China, its most important export market and trading partner, in hopes of expanding exports and attracting tourists.

Construction took five years, and the railway was officially opened at the end of 2021. However, as China’s economy now appears to be stagnant, Laos is in a position to repay its debt from railroad construction with natural resources.

The World Bank’s June China Economic Update predicts that China’s real GDP growth will drop to 4.3% in 2022. This means that China’s import demand will decline, further damaging the already fragile economic situation in Laos.

In April, the World Bank reported that inflation in Laos rose from less than 2% in February 2021 to 9.9% in April this year. This is the highest level in more than 10 years and seriously threatens the standard of living in Laos, especially for low-income households.

Public debt levels in Laos have also increased significantly since 2019. The World Bank’s tentative estimates show that total public and public guarantee (PPG) debt has increased from 68% ($ 12.5 billion) of GDP in 2019 to 88% ($ 14.5 billion) of GDP. 2021. About 50% of public debt comes from Chinese creditors.

Laos will have to repay an average of $ 1.3 billion in external debt annually from 2022 to 25. This is half the expected domestic revenue. However, Laos’ foreign exchange reserves are only $ 1.3 billion as of December 2021.

Use of borrowed capital

In recent years, Laos has invested heavily in infrastructure with borrowed capital, mostly funded by the Chinese Communist Party’s Belt and Road Initiative. The 418-kilometer Laos-China Railway is one of them.

The Laos-China Railway extends from the northern border town of Boten to the capital, Vientiane. Over 60% of the routes are bridges and tunnels with a design operating speed of 160 km / h. The total cost was RMB 40 billion (about US $ 5.9 billion), which was split into a capital adequacy ratio of 7: 3 between the Chinese company and the Lao government.

From construction, supervision, third party inspection to vehicle supply, many Chinese companies are involved in this project. Companies include China Railway Group Limited, Power Construction Corporation of China, Tianjin New Asia Pacific Engineering Construction Supervision Company, China Railway Southwest Research Institute, CRRC Qingdao Sifang Locomotive & Rolling Stock, and CRRC Dalian.

Epoch Times Photo
Taken on February 8, 2020, this photo shows some of the first rail lines connecting China and Laos. This is an important part of Beijing’s Belt and Road project, which crosses the Mekong in Luang Prabang. (Adan Jones via Getty Images / AFP)

The Laos China Railway uses Chinese equipment and materials in accordance with China’s technical standards and connects to another 595-kilometer railway in China, heading to Kunming, Yunnan, one step closer to some of China’s financial hubs. increase.

The Laos-China Railroad is only the first step in the China Communist Party’s Trans-Asia Railroad Project, as it is planned to expand to Thailand, the Malay Peninsula and Singapore.

It is clear that Chinese companies can greatly benefit from this project, the Chinese Communist Party (CCP) holds a 70% stake in the project and manages the operation and profits of the Lao China Railway. You can move forward. Their geopolitical ambitions.

In fact, in order to put the railroad plan into practice, the CCP not only offered to provide a loan to Laos, but did so with a five-year grace period. Laos did not have to start repayment of the loan until the construction was completed.

According to the agreement, Laos will donate approximately US $ 2 billion to the Laos-China Railroad Project and 30% of the project’s initial capital to China. According to an article in The NewsLens on December 1, 2021, these two components were almost completely covered by a loan provided to Laos by China’s Export-Import Bank.

However, China requires that if Laos cannot repay its debt, it must repay it with natural resources. The Minister of Energy added that Laos’s 5 million tonnes of mineral resources could be used to repay debt to China.

The economic situation in Laos is currently very pessimistic, and from March to May this year, China’s blockade of major economies such as Shanghai had a major impact on the economy.

China’s economic growth rate is expected to decline

The World Bank reports that even with stimulus, China’s real estate sector will continue to be affected by real estate companies’ de-leveraging in the short term.

Reducing industrial carbon emissions has also affected the production lines of Chinese companies, and the “Zero Corona” policy has pushed down the service sector. At the same time, China is facing adverse effects such as a shrinking labor force, a declining rate of return on capital, economic distortions and an aging population.

China is Laos’s largest source of export revenue. From 2020 to 2021, Laos’ exports to China increased from $ 2 billion to $ 2.6 billion. Major exports to China include copper concentrate and other metal minerals, pulp, paperboard, rubber, fruits, nuts, rice, corn, and other grains.

The World Bank predicts that China’s economic slowdown will adversely affect exports and production in East Asia-Pacific (EAP) countries, including Laos, Thailand and Vietnam. In addition, the effects of the war in Ukraine and rising global inflation will reduce GDP growth in the EAP region from 7.2% last year to 5% in 2022.

The slowdown in the economy and the decline in export revenues increase the risk of Laos defaulting on loans. Previously, Laos repaid part of its debt with natural resources.

Laos is blessed with water resources and has long wanted to specialize in hydropower, and has built many dams on the Mekong River. However, this entails the cost of enormous debt, including the “One Belt, One Road” initiative.

Epoch Times Photo
The adjustment dam for the Nam Tung 2 Electric Power Dam under construction is depicted on the Nakai Plateau in Laos on June 28, 2007. (Huang Ding Nam via Getty Images / AFP)

According to the World Bank, the energy sector in Laos, operated by the Lao Electricity Corporation, accounted for more than 30% of the country’s total PPG debt by 2021. And because the debt could not be repaid, the Lao government used debt vs. capital. Replace to give Chinese companies control over the country’s power grid.

In September 2020, Electricit√© du Laos transferred a majority stake to China Southern Power Grid. The parties have signed a 25-year concession agreement that will allow the China Southern Power Grid to build and manage Laos’s electricity network system, including the export of electricity to neighboring countries.

China’s demands on natural resources to repay debt have also occurred in other countries, such as Sri Lanka, which are strategically important.

Sri Lanka was forced to sign a 99-year lease in December 2017, allowing the assets and operations of Hambantota Harbor to be repaid to the China Merchants Group, a state-owned enterprise operating under the Ministry of Transport of China. It was handed over because it wasn’t there. A huge amount of debt was incurred in the construction of the port.

When the CCP signs a contract with another country through the “Belt and Road” scheme, there is usually a secret agreement. This means that citizens of these countries are unaware of the potential risks. German scholar Christoph Trebesch told the RFI that the CCP is manipulating the strictest conditions to control the country’s internal affairs.

Ann Chan

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Ann Chan is a writer of The Epoch Times, focusing on topics related to China. She started writing her Chinese version in 2014.

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