China's pan-Asian railway sputters to a halt in Thailand

Bangkok's indifference to Beijing's plan creates gap in Belt and Road network

TORU TAKAHASHI, Editor-in-Chief, Editorial Headquarters for Asia, Nikkei AsiaJanuary 16, 2022 13:32 JST

Relations between Thai Prime Minister Prayuth Chan-ocha and Chinese President Xi Jinping are under the spotlight as the success of Beijing's Belt and Road Initiative rests on Thai sector. (Source photos by Xinhua/Kyodo, Getty Images and Akira Kodaka)

BANGKOK -- China's plan to build a pan-Asian railway through the Indochina region is sputtering as construction of a connection to Thailand has stalled due to deteriorating ties and both countries' diverging priorities.

Part of Beijing's plans for the region came to fruition in December when the China-Laos high-speed railway began operating. Beijing funded 70% of the $6 billion construction project, part of its Belt and Road Initiative. It has also extended loans to Laos to cover the rest. So far, it is believed that Laos has shelled out not much more than $100 million.

Everything needed to build and operate the railway line, from design and construction to rolling stocks, signal systems and operational management expertise, was provided by China.

Laos has long struggled economically, being the only landlocked country in Southeast Asia. China has dangled the prospect of economic growth under its Belt and Road Initiative to get Laos onboard with its plans.

The rail project was first announced in 2010, and began to take a clear shape after Beijing in 2013 unveiled its plan to connect Kunming in Yunnan to Singapore by rail. Construction in Laos started in 2016.

The China-Laos railway project has been almost entirely financed and constructed by China.   © Kyodo

China has been keen to play the leading role in the building of a railway network in Southeast Asia. Its principal aim is to secure a land transport route that can serve as an alternative to marine shipping routes that pass through the South China Sea and the Malacca Straits.

For this strategy to work, China needs Thailand to cooperate as the railway line has to go through the country to reach Malaysia and Singapore. Some experts in Thailand are clamoring for quick government action to connect Thailand and Laos with a high-speed railway line, but the government has been less keen.

Ideally, China wants to build a 608 km rail link that connects Bangkok with Nong Khai Province, which is across the Mekong River from Vientiane. This line was designed for trains to carry passengers and cargoes at a maximum speed of 180 kph. To this end, Beijing had secured an agreement with Bangkok in 2015. The Thai government at that time was also keen to make the relationship work.

Under initial plans, China was committed to provide funds to a newly established joint Chinese-Thai venture to complete the link in 2020, ahead of the China-Laos line. But by the time construction began in 2017, Thailand had drastically changed the plans for the project.

Bangkok felt it had reasons to be cautious about embracing China's vision.

A China-Laos train crossing a bridge over the Yuanjiang River in southwestern China's Yunnan Province.   © Xinhua via AP

This was because of what Bangkok considered to be unreasonable demands from Beijing, including the terms of its loans and the requirement that Chinese materials and workers be used for the construction. China also wanted the right to develop areas along the railway line.

Those demands ruffled Bangkok's feathers and the project was cut by about 60% to become a 253 km railway line between Bangkok and Nakhon Ratchasima Province. It was also redesigned as a high-speed line only for passengers at a maximum speed of 250 kph.

The plan to set up a Chinese-Thai joint venture was also scrapped as it was decided that Thailand will bear entirely the total construction cost of 170 billion baht ($5 billion).

These changes sharply reduced China's role in the project. Under the new blueprint, Thailand will finance, build and operate the railway line on its own, while designs and systems for the high-speed train services will be provided by China.

Since then, the project has been proceeding at a glacial pace.

Four years later, only 4% of the work to build the Bangkok-Nakhon Ratchasima section, which the Thai government considers as the first phase, has been completed. Ground leveling has been done only for 3.5 km of the railway tracks near Nakhon Ratchasima.

The Thai government will continue considering a plan to extend the line to Nong Khai in the second phase of the project. It has finished designing the second section on its own, but the specifics of the plan, including how to raise the necessary funds, have yet to be worked out.

Only 4% of the Bangkok-Nakhon Ratchasima section has been completed in the four years after groundbreaking. (Photo by Anchalee Romruen)

Thailand is uncertain about extending the high-speed railway line to the border of Laos through a project that is essentially Beijing's which also requires it to pay for the installation of Chinese systems in addition to other costs.

This is particularly the case when Thailand already has a railway link with Laos. Its Northeastern Line connects Bangkok with Nong Khai. An extension into Laos, a 3.5 km railway track between Nong Khai and Thanaleng, just some 20 km west of Vientiane, was completed in March 2009. Cargo operations started in 2019.

Rail is not the mainstream form of public transport in Thailand, although the government has plans to double its rail tracks to expand capacity. Rail accounts for only 20% of passenger traffic and 2% of cargo transport now.

Under its initial plans with China, Bangkok thought that building a high-speed line between Bangkok and Nakhon Ratchasima will help it to reduce passengers on its Northeastern Line and carry more cargo.

But Thailand does not necessarily need a high-speed link between Nakhon Ratchasima and Nong Khai, as passenger transit along this route matters little to the country. Without it, China's Belt and Road Initiative will feature a big gap.

Thailand is also dragging its feet because high-speed rail services for passengers is already commercially viable without a link between Nong Khai and Nakhon Ratchasima, which is close to two national parks including Khao Yai, a popular summer resort. Demand for rail services to Nong Khai will not be large given that there are many budget airlines that fly there from Bangkok and southern China.

Underlying these practical considerations, a loss of trust in the Chinese has also affected how Thailand views the whole project. The bilateral cooperation was initiated by Thailand after the military coup in 2014, which provoked a wave of criticism among Western democracies and Japan.

To fend off pressure from the West, Bangkok invited Beijing to help its efforts to expand its rail network. But since construction for the first phase of the project began, Thai officials and company executives have claimed that Chinese supervisors have been difficult to work with.

For now, as Beijing needs Thai cooperation for it to realize its Belt and Road Initiative, Bangkok can afford to take its time.

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Laos opens scenic railway built on a mountain of Chinese debt

Laos opened a new $6 billion rail link with China to much fanfare this month

Lisa Martin and Pathom Sangwongwanich

Sun, December 19, 2021, 11:41 AM·4 min read

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  Laos opens scenic railway built on a mountain of Chinese debt

  Laos opened a new $6 billion rail link with China to much fanfare (AFP/STR)

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  Laos opens scenic railway built on a mountain of Chinese debt

  Laos is hopeful the railway will turn a profit by 2027, but analysts are concerned about the unsustainable Chinese loans to pay for this and other projects (AFP/STR)

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  Laos opens scenic railway built on a mountain of Chinese debt

  National debt in selected Asian countries (AFP/John SAEKI)

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  Laos opens scenic railway built on a mountain of Chinese debt

  Laos's communist leaders have long tied the nation's economic development to its huge neighbour China (AFP/STR)

Laos opened a new $6 billion rail link with China to much fanfare this month, but analysts warn the party could be short-lived as the government grapples with a potential debt crisis.

The line will connect the capital Vientiane with the southern Chinese city of Kunming, and there are grand plans for a high-speed rail network running to Singapore through Thailand and Malaysia.

Laos President Thongloun Sisoulith at the opening heralded a "new era of modern infrastructure development" for the impoverished country, adding that "the dreams of Lao people have come true".

The government is hopeful the railway will turn a profit by 2027, but analysts are concerned about the unsustainable Chinese loans to pay for this and other projects.

With a tiny domestic market, there is "limited commercial logic for an expensive railway" to connect the country of seven million to Kunming, said Jonathan Andrew Lane in an Asian Development Bank Institute report.

His analysis found that potential benefits to Laos do not appear to outweigh the risks.

"That debt service will put further strain on the limited tax-raising abilities of the government," Lane wrote.

Laos faces having to stump up vast sums of cash to pay for the rail line, which was set up as a Laos-China joint venture under Beijing's vast, trillion-dollar Belt and Road infrastructure initiative (BRI).

As the reclusive Southeast Asian country's overall debt climbs to a dizzying $13.3 billion -- making up almost three-quarters of gross domestic product -- experts fear Laos could be at risk of default.

That could bind it further to China, having already attracted the moniker "Chinese satellite state" -- Beijing accounts for 47 percent of its borrowings.

- 'Hidden debt' -

Besides a $1.06 billion debt liability, Laos has exposed itself to so-called "hidden debt" in the formation of the joint venture to finance the railway, according to AidData, a research lab at American university William & Mary.

The tie-up comprises three Chinese state-owned companies and a Lao enterprise, with Beijing staking 70 percent of the $3.54 billion debt.

Considered "too big to fail", researchers said there is some uncertainty over which country would feel compelled to bail out the joint venture if it defaulted.

If "insufficiently profitable, anywhere between 0-100 percent of the total $3.54 billion debt could become a repayment obligation of the Government of Laos", AidData warned.

Another hidden debt is Laos' equity stake in the joint venture: a separate $480 million loan also financed by the Chinese -- which suggests the tiny nation's asset "may be worthless", the lab added.

Laos's communist leaders have long tied the nation's economic development to its huge neighbour.

Between 2008-2019, it signed a total of $5 billion in Chinese loans for more than a dozen infrastructure projects -- the lion's share spent on dams and hydroelectricity generation.

By August 2020, global credit agency Moody's downgraded the country's credit rating to junk status. Fitch Ratings followed soon after.

- 'What is the alternative?' -

Laos Prime Minister Phankham Viphavanh -- installed in March -- hopes to reduce debt from 72 percent to 64.5 percent of GDP by the end of 2023.

But in the meantime, Laos owes $1.16 billion per year between 2022 and 2025, Fitch Ratings says.

Its public debt is higher than most regional counterparts -- including Cambodia, Vietnam and the Philippines -- which also have Chinese-financed infrastructure projects, according to the International Monetary Fund.

As of early 2021, Laos was "on the brink of sovereign default and urgently seeking debt relief from their Chinese creditors", AidData said.

But China is often reluctant to cancel BRI debts, instead offering deferrals -- sometimes with higher interest rates -- or rescheduled payment plans.

In September, Laos sold its electricity transmission grid to a Chinese state-owned enterprise for $600 million, an apparent debt-for-equity swap, according to researchers.

Fitch said in August that further national assets sales are expected.

This trend has been seen in other Asian nations shouldering high Chinese debt.

One of the most prominent cases was Beijing's 2017 takeover of Sri Lanka's Hambantota port after the country was unable to repay a huge loan.

AidData said in September that BRI had saddled poor nations with "hidden debt" worth $385 billion, and more than a third of its projects were hit by alleged corruption and protests.

But while the outside world mulls whether China is taking over Laos, the Lowy Institute's Ben Bland said the impoverished state has little choice in its search for partners to grow its economy.

"What is the alternative? It doesn't seem that other foreign investment and development partners are eager to supplant China," he told AFP.

ton-lpm/dhc/dan/qan

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Debt-trapped: Sri Lanka, Laos, and now Uganda?

Southeast Asia should take note of the potential takeover of an airport by Chinese lenders, Zachary Abuza says.

Commentary by Zachary Abuza
2021.12.01

Ugandan president Yoweri Museveni (in hat) and Wang Yang, China's third vice premier, inaugurate a Chinese-funded 51-km expressway linking Uganda's capital to the international airport at Entebbe, June 15, 2018.

AFP

In what is being described as another case of “debt trap” diplomacy, China’s Export-Import Bank appears poised to take over Uganda’s Entebbe Airport and other assets because the African nation is struggling to service a U.S. $207 million loan for local infrastructure projects.

China – which agreed to expand the airport in 2015 as part of its Belt and Road Initiative (BRI) global infrastructure-building program – has denied reports that it may grab control of Uganda’s international airport because of the country’s failure to pay off the debt.

The site gained infamy in 1976 as the location of the Israeli Defense Force’s daring hostage-rescue operation after Ugandan dictator Idi Amin allowed the Popular Front for the Liberation of Palestine to land a hijacked Air France jetliner there.

But it is Uganda’s only international airport, which raises questions about China’s domination of critical infrastructure – with very real implications for Southeast Asia.

If it takes place, the debt-for-equity swap in Uganda follows China’s 99-year takeover of Sri Lanka’s Hambantota port and a nearby airfield in 2018, and the 2020 takeover of much of the Lao power grid by a Chinese state-owned firm. 

According to a September 2021 report by the AidData project at the College of William and Mary in the United States, Uganda took on 144 Chinese-financed projects between 2000 and 2017, and its sovereign debt to China accounts for 8 percent of its gross domestic product.

But Uganda’s “hidden debt” to China accounted for zero percent of GDP. This is highly unusual.

‘Hidden debt’

Let me explain this in brief terms. 

Roughly 70 percent of China’s BRI funding comes in the form of loans, not grants.

Sovereign debt is money that a country’s government owes to foreign and domestic lenders. It is almost never collateralized. But commercial lending from the China Development Bank, the Export-Import Bank of China and other BRI lenders almost always is.

That collateral can take many forms: sometimes China forces the borrower to have a certain amount of assets in a Chinese bank that can be frozen; other times, the recipient country puts up assets as collateral, meaning that it will forfeit those assets if it fails to repay its debt.

Very little of China’s BRI lending is favorable to the borrower. The interest rates average around 4 percent, nearly four times more than World Bank, Asian Development Bank, Japanese, European or American lending.

In addition, in the Philippines, BRI projects have dispute resolution mechanisms that are skewed toward China. This is likely the case in other Southeast Asian BRI agreements.

Another kind of lending – called Other Official Flows, or OOF – involves state-owned companies, state-owned banks, joint ventures, and private sector institutions, rather than central banks. As such, it is not always publicly reported.

The AidData project’s 2021 report found that due to this “hidden debt,” the average government “is under-reporting its actual and potential repayment obligations to China by an amount that is equivalent to 5.8 percent of its GDP.”

Uganda was the 19th largest recipient of Chinese grants and carried very little in the way of OOF loans, and yet it still seems unable to service its debts.

Now of course, China could renegotiate the terms of lending, or write off the debt, as a grant. But Beijing has shown little interest in doing so. Indeed, in March 2021, the Ugandan government sent a delegation to Beijing to renegotiate the loan terms, but returned empty-handed.

Beijing is refusing to budge for two reasons. First, the Chinese are legitimately afraid of creating a precedent. If one country gets to renegotiate the terms, all the others will clamor for the same.

Second, BRI lending really slowed in 2018-2019, which suggests that many of the loans were non-performing. If people aren’t paying back the loans, there’s less for the banks to lend out, unless Beijing injects a lot of new capital. It may be doing that now, as lending seems to be picking up.

How this plays out in Southeast Asia

According to the report from the AidData project, China provided $10.7 billion in grants to four Southeast Asian states between 2000 and 2017, and $87.7 billion in OOF loans to six states in the region.

In all countries with the exception of Singapore, which doesn’t borrow from Beijing, sovereign debt loads to China, as a percentage of GDP, range from 1 percent in Cambodia to a whopping 29 percent in Laos. Myanmar is second (5 percent), followed by Vietnam (3 percent). Several states have none. Not including Laos, which is such an outlier, the region’s sovereign debt load to China is a modest 1.4 percent of GDP, on average.

The hidden debt loads tell a different story. The highest amount is Laos at 35 percent of GDP, followed by Brunei (14 percent), Myanmar (7 percent), Vietnam (3 percent), Indonesia (2 percent), and Cambodia (1 percent). Again, excluding the outlier Laos, the average hidden debt to China in the region is 3.4 percent, over twice the amount of sovereign debt.   

While 3.4 percent is not unusually high, remember that those loans are at commercial lending rates and are almost all collateralized. Brunei, Cambodia, Laos and Myanmar have public debt exposure to China over 10 percent of GDP. In July 2021, the World Bank estimated that Laos’ overall debt would increase to 68 percent of GDP, up from 59 percent in 2019.

It’s hard to imagine that Laos will be able to service its debt for a $6 billion railroad, especially because the Thai government has not completed a rail link that would connect the Chinese city of Kunming to Thai ports – the only economically viable reason for the Lao portion.

Laos has benefited from a recent Thai decision to buy more hydroelectricity, which should allow the Laotians to continue to service debts for their cascade of Chinese-funded dams. Vietnam had to begin servicing a $670 million debt for a Chinese-constructed rail line that still had not opened, after years of delays and a 57 percent cost overrun since the project began in 2011.

With economic slowdowns caused by the ongoing coronavirus pandemic, which is unlikely to end any time soon, the region’s hard-hit economies will see weaker recoveries than forecast. 

The Asian Development Bank recently downgraded its 2021 growth estimates for every country in the region except for Singapore and the Philippines, and estimated that regional growth would be 3.1 percent in 2021, not 4.4 percent. Revenue will be down for all states, while the continued public health and stimulus costs are rising.

All of this will impact the ability of regional states to service their debt. 

China may be willing to play harder ball with African countries than with neighboring Southeast Asia, where public perceptions about China are starting to sour.  But China keeps pushing its BRI projects on the region, with new projects announced in Malaysia, and a determination to see projects completed in Myanmar despite the civil unrest since the Feb. 1 coup d’etat and an 18 percent contraction of the Burmese GDP. 

The region’s high levels of public indebtedness – and fear of asset seizures by China – should raise a lot of concern, both among Southeast Asian governments and their citizens. And BRI’s heavy reliance on Chinese workers and managers who tend not to return home, shoddy construction, environmental degradation, and corruption should raise even more concern.

Zachary Abuza is a professor at the National War College in Washington and an adjunct at Georgetown University. The views expressed here are his own and do not reflect the position of the U.S. Department of Defense, the National War College, Georgetown University or BenarNews.

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