The economics of a new China-Laos train line

IN THE LATE 1860s, French sailors who had set off from Saigon to find the source of the Mekong river encountered the precipitous Khone Falls between Laos and Cambodia, and realised that the waters would be impassable for larger trading vessels. Their dreams of reaching the riches of southern China by river were dashed. Quixotic plans for rail networks followed, first from British and French imperialists, and then from the Association of South-East Asian Nations (ASEAN), which in 1995 outlined its ambition to connect Singapore with Kunming, in China’s Yunnan province.

On December 3rd, at long last, a portion of those aspirations was realised. 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 comes with a hefty price tag of $5.9bn—equivalent to nearly a third of Laos’s annual GDP before the pandemic.

For China, the rationale for closer links with South-East Asia is clear. Rising factory wages at home make the case for moving low-complexity manufacturing to cheaper nearby locations. In 2019 Vietnam was China’s fourth-largest trading partner for intermediate goods, between America and India, and up from 15th place a decade ago. China’s intermediate-goods trade with Cambodia and Laos has risen nine- and 11-fold, respectively, in the same time.

The strategy has historical precedent. Until the 1970s Japanese firms’ main interest in South-East Asia was buying raw materials. Then they began moving production to the region. The shift took off after the Plaza Accord of 1985, at which Japan agreed to let the yen appreciate, which widened the gap between domestic wages and those in low-cost countries. Firms were able to preserve their competitive advantage by moving, while also fostering technological expertise elsewhere.

What does the new train line mean for Laos? The landlocked country suffers most from South-East Asia’s limited connectivity. The World Bank has been cautiously optimistic about the new route: Vientiane, it reckons, could become a logistical hub into China from Thai ports, but only if the Lao customs system were made more efficient and connecting roads improved. Although Laos has a land border with Yunnan and no coastline, as recently as 2016 almost two-thirds of its exports to China were transported via maritime routes.

Other assessments, however, are less optimistic. A paper published by the Asian Development Bank Institute last year suggested that the investment was unlikely to be profitable given its expense. Opinions of the Belt and Road Initiative have soured since 2016, and fears have risen that the infrastructure acts as a debt trap which gives China influence over borrowers. Laos has assumed 30% of the liability for the project, most of the funding for which was borrowed from the Export-Import Bank of China. Nor will the line bring in Chinese tourists for the foreseeable future, given China’s zero-covid policy.

A wider network across the region would yield greater economic benefits for everyone, but that is outside any one country’s control. Thailand approved the first step of a Chinese-built high-speed line in March; it is intended to reach the Lao border at a later stage. Even the first half is not expected to be completed for five years, however, and such schemes often miss their deadline, if they materialise at all. The Malaysian government is studying a high-speed link to Bangkok, but serious discussion has barely begun. Until those longer-term benefits arrive, Laos may mainly be stuck with the bill. ■

For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.