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Laos to open a Chinese-bound railway as it fears to take over from Beijing

Laos will unveil China’s $ 6bn railway on Friday, the largest public works project in its history, which experts warn could expose a poor Southeast Asian country to financial risk or political pressure from Beijing.

The 414km line, which runs from Boten, near the Chinese border, to the capital Vientiane, has been built under China. Belt and Road Initiative, Xi Jinping’s signature infrastructure program.

Laotian officials expect the line to reduce shipping costs, boost shipping and bring in more foreign tourists as soon as the Covid-19 plague subsides and reopens the border.

Chinese companies drilled 75 canals, built the Mekong River crossing in Luang Prabang and converted small areas to connect Laos with China’s provincial capital Kunming and help the country gain access to international markets.

But researchers warned about the dangers represented gambling in a country with a high debt 7m.

“There are positive potential for this project,” said Jeremy Zook, chief executive of Asia-Pacific ratings and Fitch Ratings. “The downside is that this is a very expensive railway, so the question is whether these raids are enough to make all the financial sense based on its cost.”

As with other BRI projects – especially the Chinese-built port in Hambantota, Sri Lanka, lease to China Colombo struggled to manage his debt – experts doubted Laos would be able to manage its finances.

“This is one of the things that worries me the most: how to manage debt,” said Ruth Banomyong, professor of management at Thammasat Business School in Bangkok. “High-speed railways have always been economically uncertain.”

The cost of building the railway was about one-third of Laos’ GDP. Of that amount, the Lao-China Railway Company, the construction and operator of the railway, borrowed $ 3.54bn from China Eximbank.

The LCRC has Chinese and Laotian companies owned by the state as owners, with a 70:30 per cent stake in China-Laotian ownership.

Bar chart As% of GDP, 2020 shows Total Debts

To pay for its share, Laos borrowed $ 480m from China’s Eximbank and financed $ 250m, in addition to reimbursing rural rehabilitation.

But researchers affiliated with the AidData lab at William & Mary University in Virginia said in a a recent report there was a “non-minor possibility” that Laotian or Chinese officials would feel obligated to give money to the LCRC if they failed to fulfill their obligation to the bank because the railway is a state fund.

Laos is expected to repay $ 1.3bn in foreign debt annually by 2025, according to the World Bank, after borrowing large sums of money to finance electricity and other construction projects. Its total debt last year reached $ 13.3bn, or 72 percent of GDP, as the government relied on borrowing to finance electricity and other services.

The World Bank recently warned that the country is out debt problem remained high and its foreign exchange earnings fell, about $ 1.2bn from May.

Laos handed over most of its power grid last year to a Chinese company as it struggled to avoid instability, according to Reuters.

“Their financial resources are increasing, so it has been difficult for them to repay and restructure some of the things they need to do,” Zook said. Fitch has given Laos the opportunity to stand on its own three Cs, proving that “immutability is really possible”, he added.

Follow John Reed on Twitter: @JohnReedwrites




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