China’s growing influence in Laos, marked by expanded investment and trade, has led some international agencies to warn Laos about an unhealthy financial dependence on China. Analysts say Laos is looking to balance China’s influence by drawing support from longstanding backer Vietnam as well as the West.
In 2014 China became Laos’ leading investor with funds totaling more than $5 billion, with projects in mining, resources, hydropower and agribusiness.
Laos and China have agreed to build a $7 billion high-speed railway project, part of China’s strategy of ‘One Belt, One Road’ plan of rail links across Central Asia as well as South East Asia.
The train routes into South East Asia will begin in Kunming in China’s Yunnan province, with its more than 150 bridges, 76 tunnels and 31 train stations running through Laos, to Vientiane. From there it will connect to Thailand with plans of trains eventually reaching Singapore.
China's influence expanding
Carl Thayer, a defense analyst at the University of New South Wales says the investment marks a further extension of China’s influence, especially into countries of the Association of South East Asian Nations (ASEAN), especially Thailand, Myanmar, and Cambodia.
“It’s all part of both China’s push to develop its trading route southward and improve the infrastructure - ASEAN connectivity - and obviously wanted by Thailand because it will go through Laos and wind up in Thailand," he said. "You have a steady accretion of China - the high-speed rail makes Laos go heavily into debt for concession loans.”
Analysts say the loans, with Laos using the country’s untapped minerals as collateral, will sharply increase Laos’ debt, with the borrowings representing almost 90 per cent of the country’s annual economic output.
The Asian Development Bank (ADB) says the rail line investment is unaffordable for a small economy of six million people, who mostly rely on agriculture to make a living.
Hydropower investments
China is also a leading investor in hydropower, with several dams planned to be built on tributaries from the Mekong River with reports indicating China is preparing to sign contracts for up to nine new dams. Laos’ northern provinces rely on electricity from China, as most Laos hydropower power is exported to neighboring Thailand.
Analysts say China’s dominant position is raising fears over destruction of biodiversity, land eviction and unemployment among displaced farmers.
Chulalongkorn University political scientist, Thitinan Pongsudhirak, says China sees Laos as a key step in widening its influence in the region.
“Of the countries involved, Laos is most at risk of coming under China’s domination. Laos is a small country, small economy and China is not afraid to make the mainland South East Asia space into its own backyard. It is doing that now," he said. "Mainland South East Asia is completely in China’s orbit."
Laos’ economic growth is running at close to seven percent, but remains dependent on areas generating low employment, such as resource extraction and hydropower.
The World Bank has called on Laos to diversify its economy in order to generate employment for the more than 90,000 new entrants coming on to the labor market each year.
Laos’ financial state has also been weak. In July last year the government appointed a new finance minister amid a widening budget deficit with the government. A decree calls on the general public to tighten household budgets and curb spending.
Thitinan says the weak financial position adds to Laos’ vulnerability.
“Financial constraints have put Laos in a precarious position. The Laos macro economy is not in good shape. As a consequence it has had to rely on China and China plays this very well - by extending more loans and more projects into Laos. So Laos has to be very careful,” he said.
Striking a balance
Historically, Laos has had longstanding close relations with neighboring Vietnam, dating back even before the Indochina wars of the 1960s and 1970s. These strong ties have continued between the communist governments since the Indochina wars.
But Martin Stuart-Fox, emeritus professor of History at the University of Queensland, says China has developed a policy aimed at weakening the bonds between Laos and Vietnam.
“As Chinese economic influence increases - it goes hand in hand with increasing political influence," he said. "The Chinese have always been determined that they are going to be at least as influential as the Vietnamese. There was a decision in Beijing that Laos was not going to be just left as a Vietnamese sphere of influence.”
Analysts say the Lao government recognizes a need to strike a balance between China and Vietnam, and draw support from the West.
In 2016 Laos will take up the chair of ASEAN, seen as an opportunity for Vientiane to gain leverage and bargaining power in dealing with its larger neighboring rival powers.
