HomeExpansionismMission Accomplished: China Now 'Owns' Laos

Mission Accomplished: China Now ‘Owns’ Laos

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Laos, a small Southeast Asian country known for its beautiful landscapes and rich culture, now finds itself at the mercy of a massive debt crisis, primarily due to loans from China. The situation has become so dire that experts claim no other nation has a higher debt exposure to China than Laos. This predicament has sparked widespread concern about the country’s future and the potential consequences of this financial entanglement.

The Debt Situation

Laos’s foreign obligations have nearly doubled, causing the country to seek delays in repayment to avoid default. Over half of Laos’s $10.5 billion in external government debt is owed to China, making it the largest creditor by far. The total public debt of Laos reached $13.8 billion by the end of last year, an alarming 108% of its GDP.

The bulk of this debt stems from infrastructure projects under China’s Belt and Road Initiative (BRI). Laos has borrowed billions to fund projects like roadways, high-speed trains, and hydroelectric dams. One such project, a high-speed train route linking Laos with China, cost nearly $6 billion and is seen as both a symbol of progress and a significant contributor to the debt crisis.

Brad Parks, executive director of the AidData research lab at William & Mary, emphasized the severity of the situation by stating, “There is no country in the world with a higher amount of debt exposure to China than Laos. It is a very, very extreme example…Laos went on a borrowing spree and got in over its head.”

Economic Strain and Public Reaction

The debt crisis is exacerbated by a currency crisis and rising global food and fuel prices, which have driven the Laotian kip to record lows against the US dollar, resulting in skyrocketing inflation. At its peak, inflation rose to more than 41%, severely impacting the cost of living for the Laotian people.

The government has implemented measures like raising interest rates, issuing bonds, and collaborating with the Asian Development Bank to manage the debt. However, these measures have led to reduced spending on essential services like healthcare and education, impacting the long-term welfare of the population.

The economic strain has also sparked unprecedented discontent among the Lao people. Criticism of both the Chinese influence and the Laotian government has become more vocal, especially on social media, which is unusual in the typically controlled environment of the one-party socialist state. The frustration is evident in comments from locals who feel their country is losing its sovereignty and control over vital infrastructure to China.

Nin, a 23-year-old vegetable seller, expressed her concerns, saying, “Laos is so indebted to China that [the Chinese] can come over here [and] take our land.” This sentiment reflects a growing unease among the population about the increasing Chinese presence and influence in their country.

China’s Role and Global Implications

China has offered to help Laos manage its debt, but this assistance comes amid accusations of “debt trap diplomacy”—a term used by critics to describe how China allegedly uses loans to gain leverage over other countries. While China denies these claims, stating that its cooperation with developing countries is mutually beneficial, the reality on the ground in Laos tells a different story.

In a written response to inquiries, a spokesman for China’s Ministry of Foreign Affairs said that Beijing has engaged in “mutually beneficial cooperation” with developing nations like Laos, which includes significant support for social and economic development. The spokesperson added, “At the same time, it has been doing its best to help relevant countries alleviate their debt burden.”

However, Chinese companies now control significant parts of the electricity infrastructure, and Chinese security forces operate within the country to protect investments like the new railway. These developments have raised concerns about the loss of sovereignty and increased Chinese influence in domestic affairs. Human rights organizations and Lao activists claim that Laos has had to make compromises, including allowing Chinese security agents and police to operate in the country, as a trade-off for financial forbearance.

The Broader Picture

The Laotian debt crisis is part of a larger trend of countries struggling under heavy Chinese debt. China has loaned nearly $1 trillion to developing nations, fundamentally altering its global standing. This massive lending spree has positioned China as the world’s largest debt collector, a role that comes with significant diplomatic challenges.

China’s lending practices have often come under scrutiny. An Associated Press investigation last year covering 12 states most indebted to China, including Pakistan, Kenya, Zambia, Laos, and Mongolia, revealed that the amount of tax money required to pay for basic necessities was increasing steadily to repay the debt. The investigation noted that China’s reluctance to forgive debts and the lack of transparency surrounding the amount and conditions of loans has prevented these countries from receiving financial assistance from other nations. This often leaves indebted states with few options.

A case in point is Sri Lanka, which experienced its first-ever default in 2022 when its foreign reserves began to decline. The South Asian country announced last month that it had finalized restructuring deals totaling $10 billion, including with China’s Exim Bank and an Official Creditor Committee of bilateral lenders.

The situation in Laos highlights the risks of rapid development funded by external loans, particularly when dealing with a powerful neighbor like China. As Laos struggles to find a way out of its financial woes, the lessons learned here will likely resonate with other nations in similar predicaments.

The Impact on Daily Life

The economic turmoil in Laos has led to significant changes in the daily lives of its citizens. The depreciation of the Laotian kip by more than 43% against the US dollar has made virtually everything more expensive, as the country imports most of its goods. Farmers can no longer afford fertilizers, children are dropping out of school to work, and families are cutting back on healthcare.

A 52-year-old seller of dry goods noted that the price of noodles has tripled, turning a staple into a luxury. Sonesavanh, a 46-year-old whose husband has depression, has turned to Buddhist healing because the medical treatment he needs in Thailand is now unaffordable.

Soutchai Phouthivong, a 60-year-old driver of a songthaew (a shared taxi), described the impact on his livelihood. His income has fallen by more than half this year due to fewer Lao people traveling to Thailand for goods and services. “Look, it is now almost noon and there are no Lao people around,” he said. “I am lucky to do one or two trips a day.”

The Future of Laos-China Relations

On one hand, China’s investments have brought modern infrastructure and economic opportunities to Laos. On the other hand, the heavy debt burden and the loss of control over key assets have sparked resentment and fear among the Laotian people.

The high-speed railway from Vientiane to the Chinese border is a prime example of this duality. While it has reduced travel time across the country from two days to three hours, the benefits of this project have primarily flowed back to China. Most of the freight traveling on the railway is Chinese goods, and only a few Laotian companies, mainly those with Chinese connections, have been able to utilize the link for exports.

This is the endgame for China’s debt trap diplomacy. The Laotian people have not benefitted much, and indeed are suffering from massive inflation. Laos has no way of repaying the debt, China will absorb key assets.

China owns Laos in every way that is relevant.

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