The economy of a new China-Laos railway line

IN LATE In the 1860s, French sailors who had set out from Saigon to find the source of the Mekong encountered the steep Khone Falls between Laos and Cambodia, and realized that the waters would be impassable for larger merchant ships. Their dreams of reaching the riches of southern China by river were dashed. Chimerical plans for rail networks followed, first from the British and French imperialists, then from the Association of Southeast Asian Nations (ASEAN), which in 1995 set out its ambition to link Singapore to Kunming, in the Chinese province of Yunnan.

Listen to this story

Enjoy more audio and podcasts on ios Where Android.

On December 3, finally, some of these aspirations were realized. A high-speed rail line connecting Kunming to Vientiane, the capital of Laos, was opened after five years of construction. The route is part of China’s Belt and Road Initiative, and the completed section has a hefty price tag of $ 5.9 billion, or nearly a third of Laos’ annual budget. GDP before the pandemic.

For China, the rationale for closer ties with Southeast Asia is clear. Rising factory wages in the country justify moving low complexity manufacturing to cheaper locations nearby. In 2019, Vietnam was China’s fourth largest trade partner for intermediate goods, between America and India, up from 15th ten years ago. China’s trade in intermediate goods with Cambodia and Laos grew nine-fold and eleven-fold, respectively, at the same time.

The strategy has a historical precedent. Until the 1970s, the main interest of Japanese companies in Southeast Asia was to purchase raw materials. Then they started to move production to the area. The change took off after the 1985 Plaza Accord, in which Japan agreed to allow the yen to appreciate, which widened the gap between domestic wages and those in low-cost countries. Companies have been able to preserve their competitive advantage by relocating, while promoting technological expertise elsewhere.

What does the new train line mean for Laos? The landlocked country suffers the most from Southeast Asia’s limited connectivity. The World Bank has been cautiously optimistic about the new route: Vientiane, it says, could become a logistics hub to China from Thai ports, but only if the Laotian customs system is made more efficient and connection routes improved. Although Laos has a land border with Yunnan and no coastline, in 2016 almost two-thirds of its exports to China were transported by sea.

Other assessments, however, are less optimistic. An article published by the Asian Development Bank Institute last year suggested that the investment was probably not profitable given the cost. Views on the Belt and Road Initiative have deteriorated since 2016, and fears have grown that the infrastructure is acting as a debt trap that gives China leverage over borrowers. Laos assumed 30% of the project’s responsibility, most of the financing of which was borrowed from the Export-Import Bank of China. The line will also not attract Chinese tourists for the foreseeable future, given China’s zero covid policy.

A larger network across the region would produce greater economic benefits for everyone, but this is beyond a country’s control. Thailand approved the first leg of a high-speed line built in China in March; it is planned to reach the Laotian border at a later date. However, even the first semester is not expected to be completed for five years, and such projects often miss their deadline, if they come to fruition. The Malaysian government is considering a high-speed link to Bangkok, but serious discussions are just beginning. Until those longer-term benefits arrive, Laos could mostly be grappling with the bill.

For a more in-depth analysis of the biggest stories in economics, business and markets, sign up for Money Talks, our weekly newsletter.

This article appeared in the Finance & economics section of the print edition under the title “On the rails”

Comments are closed.