The new train between Laos and China

With the high-speed line between Kunming and Vientiane, a larger project connecting the People's Republic and South-East Asia begins

By Lorenzo Riccardi, Managing Partner RsA Asia

In April 2023 there was the inauguration of the first high-speed passenger train between China and South-East Asia, connecting the city of Kunming, capital of China's Yunnan province, and Vientiane, capital of Laos. The journey takes about ten hours and covers 1,035 kilometres.

The railway is a project that is part of the Belt and Road Initiative, costing 6 billion dollars, and the operation started in December 2021 for cross-border freight transit only and in April 2023 for passenger transport. The high-speed network aims to promote the movement of people and goods between South China and South-East Asia, facilitating trade and logistics in the region.

This project has a historical value and follows the region's connection initiatives that in the past also saw European countries as protagonists. In fact, at the beginning of the 20th century, a railway was built linking the city of Yunnanfu, in the Chinese province of Yunnan, to Hanoi, mostly built by Italian companies, workers, and technicians.

The new Kunming-Vientiane railway will increase bilateral and regional trade and investment with new jobs in the area and the revival of the tourism sector, also thanks to the new flow of Chinese travellers. The World Bank estimates that the Laos gross domestic product will increase by 21% following the construction of the railway.

In the first four months of 2023, the ASEAN region was confirmed as Beijing's top trading partner with an interchange of $304.6 billion, including $185.2 billion in exports to ASEAN and $119.5 billion in imports to China. Compared to the same period last year, there was an increase in aggregate trade volume of 6 per cent and in exports from China to Southeast Asian countries of 15 per cent.

This is the first segment of a larger project that will connect Beijing with Singapore via Laos, Thailand, Malaysia and connect the capitals Vientiane, Bangkok, Kuala Lumpur and Singapore with 5,500 kilometres of high-speed network to promote the region's logistics, trade and tourism.

Laos and Vietnam bet on wind energy

ASEAN countries are making progress towards their commitment to renewable energy. In this strategy wind energy is becoming increasingly important.

According to a report by the Southeast Asia Energy Outlook 2022, energy demand in Southeast Asia has been increasing by an average of 3% annually over the past twenty years. This trend is expected to continue until 2030. Although the Covid-19 pandemic has slowed down the economic development of the region, the report projects that the region's GDP will grow by an average of 5% annually until 2030 before dropping to an average of 3% until 2050. Energy plays a critical role in this economic growth. Since the mid-1990s, the region has heavily relied on oil imports from the Middle East and Africa. If current policies remain unchanged, oil imports will increase. However, the recent price hikes and the Ukraine crisis could have a long-term impact on how natural gas is used in the region by affecting public perception of affordability and government attitudes towards investing in gas import infrastructure.

In this context, ASEAN countries are making progress towards their commitment to renewable energy. Indeed, in 2020/2021, they updated their NDC targets and have plans to achieve them by specific years. For example, Thailand aims to reduce GHG emissions by 20-25%, while Indonesia aims for a 29-41% reduction by 2030. Other countries have set their targets and implemented strategies to achieve them. During COP26, 8 of 10 ASEAN countries announced their will to reach net zero targets, the earliest by 2050 and the latest by 2065. To reach these targets, ASEAN governments are diversifying their renewable energy resources. Among these, wind energy is becoming increasingly important.

Before COVID-19, the demand for electricity in Vietnam was projected to rise at a rate of 10% per year. Based on forecasts, this demand is expected to surge by five times its current level by the year 2050. Therefore, diversifying renewable energy technologies and engaging with local partners and governments is essential. At the moment, in Vietnam, the government is prioritizing wind power over solar. With a coastline of over 3,000 km, offshore wind power provides excellent opportunities. Vietnam has a technical potential of up to 599 GW, larger than other Southeast Asian peers. The government has taken prompt action to stimulate wind energy growth by updating supporting mechanisms and introducing a public-private partnership model. Vietnam's commitment to decarbonization is promising, and wind power has immense potential to thrive. 

However, for the moment Vietnam generation capacity is not able to satisfy its energy needs and the aim of net zero emissions by 2050. Indeed, Vietnam and Thailand have set goals to achieve net zero greenhouse gas emissions by 2050. Laos is looking to capitalize on this demand. The growing demand for renewable energy in neighboring countries has led Laos to turn to a wind power investment strategy. Laos exports approximately 80% of its electricity to neighboring Thailand and Vietnam, contributing 30% of its export value. Additionally, the country is building transmission infrastructure in order to supply power also to Cambodia. 

Indeed, Laos, a prominent hydroelectric power exporter in Asia, is diversifying its energy portfolio by venturing into wind power to reduce its reliance on water resources. In this context, Laos is making a significant effort to reduce its dependence on hydropower for electricity generation. While hydropower currently accounts for 70% of the country's total electricity generation, concerns about its dependence have prompted Laos to shift towards wind power generation. This shift is due to a couple of reasons. Firstly, Laos' hydropower production usually decreases during the dry season. Secondly, China's control of the upstream rivers poses a risk of sudden changes in water levels, which poses a threat to agriculture and fisheries. Furthermore, a hydroelectric dam built by South Korean and Thai companies in the Attapeu province of southeastern Laos broke out in 2018, resulting in at least 71 deaths and over 6000 homeless. Nowadays, wind power generation has become a promising option for Laos. Wind farms are more efficient than solar panels as turbines can work almost day and night. 

The country is currently constructing a wind farm in the scarcely populated mountainous region of southeastern Laos, which is slated to commence operations in 2025. The project involves several companies, including Mitsubishi Group (Japan) and BCPG Renewable Energy Company (Bangchak, Thai Energy Group). It will supply electricity to Vietnam for a period of 25 years. The Monsoon wind farm will occupy an extensive area of 70000 hectares and comprise 133 wind turbines, making it one of Southeast Asia's largest onshore wind farms, with a generation capacity of 600 megawatts. Laos' energy policy is export-oriented, and the country has already planned similar wind power projects.

Laos and the 80 million unexploded bombs

Laos has a serious problem: 80 million unexploded ordnances (UXO). Although the population has found solutions to adapt to the situation, Laos still struggles to cope with the problem of UXO.

Laos holds one of the most critical records in the world: it is the country with the highest per capita number of unexploded ordnance (UXO), having about 80 million UXOs still scattered across the country. According to the Japanese Foreign Ministry, more than two million tons of bombs were dropped on Laos during intense air raids in the Vietnam War period. To be precise, it is estimated that between 1964 and 1973, the U.S. Air Force dropped 270 million cluster bombs on Laos. The goal of the Americans was, on the one hand, to prevent the Laotian allies of the Vietnamese communists from winning the civil war in Laos and, on the other hand, to block supplies moving from Laos to Vietnam. According to some estimates, Laotians saw their land bombed every eight minutes, 24 hours a day, for nine years. 

Of these bombs, about 30% are still unexploded, posing a serious danger to Laos’ citizens. In fact, in the country, there are numerous casualties from these unexploded ordnances every year. Although the government has only started keeping track of deaths caused by UXOs since 2008, the website "Legacies of war" estimates that in Laos, since the end of the war, more than 20 thousand people have been killed or injured by unexploded ordnance. Sometimes UXOs explode because they are unearthed accidentally by farmers tilling fields or during ordinary everyday moments (such as cooking outdoors in the vicinity of a UXO).

Unfortunately, about 40% of UXO victims are children. For example, in 2021, an unexploded ordnance injured Soupha, a 9-year-old boy, and killed two of his friends. The children had started playing with the bomb mistaking it for a ball. In fact, each cluster bomb is usually composed of 200 sub-munitions. For this reason, often, these unexploded ordnances have the modest size of a tennis ball seeming harmless in the eyes of children. 

Even in urban centres, Laos’ citizens are accustomed to dealing with unexploded ordnance. For example, a few days after the start of 2023, specialists from the Laotian army found an unexploded ordnance (UXO) in the centre of the northern city of Kasi. The military had to isolate the entire surrounding area to remove the cluster bomb.

Throughout the years, Laotian people, therefore, started to adapt to the presence of unexploded bombs and mines, even trying, in some cases, to take advantage of them. For example, Kommaly Chanthavong, founder of a cooperative that produces silk, has tried to teach her fellow citizens how to defuse bombs to cultivate fields and plant mulberry trees to feed silkworms safely. Other Laotians use these unexploded ordnances as raw material to create cutlery or jewels. For example, La lok Phengparkdee, a 23-year-old boy, collects unexploded bombs and makes spoons from them. The boy reveals that his father started this odd job in 1978 and that he is continuing this family tradition. Also the Italia association: "No war factory" plays a part in the process of transformation of bombs. This association directly purchases handmade jewellery produced by some families in Laos using war scraps. Once this jewellery is imported into Italy, it is enriched with stones and sold on the Italian market. In this way, the association helps the Laotian economy also by donating a portion of the profits to the MAG (Mines Advisory Group) association, which has been working on ordnance removal in Laos since 1994. 

Unfortunately, despite the efforts made by the population over the years to adapt to this situation, unexploded ordnance remains a complex problem for one of the world's poorest countries, where people often live on less than $1.25 a day. In fact, 70% of the population lives in rural areas where the fields necessary for cultivation are often unusable because of the tens of millions of unexploded bombs. Moreover, despite assistance from countries such as Japan, the United States and others, the government does not have enough resources to initiate a continuous and effective UXO removal campaign.

Laos, crisis opportunity for reform

Public debt and inflation are on the rise, but according to several analysts, the current problems of the Laotian economy can become a boost for the future

By Ilaria Zolia

Laos has been hit hard by the effects of the pandemic but also by the food and inflationary crisis. With rising fuel prices caused, in part, by the depreciation of the Kip, many farmers have left the countryside and gone abroad in search of work. According to the Food and Agriculture Organization of the United Nations, about 20 percent of Laotian farmers cannot afford to plant rice because of the increases. Laos' recent economic performance describes this reality. Public debt has risen from about 70 percent of GDP in 2019, to 88% in 2021, according to Lao government data. Inflation has also risen, from less than 2% in February 2021 (year-on-year) to 30% in August 2022, threatening the standard of living especially of low-income urban households. In contrast, hydropower and mining have expanded rapidly, becoming dominant sectors. Investments to expand these two sectors have been financed with external loans, but these projects have not yet generated revenue due to long gestation periods. However, according to some analysts, the crisis may be a starting point for the implementation of major development reforms. This turnaround could take place through reforms on public debt reduction and improvements regarding public expenditure management, which would ensure increased revenues. According to Nikkei Asia, the country will need to know how to make the most of the resources it already has, such as its natural capital and its young citizens. It would therefore be important for Laos to invest in its population, increasing spending on health and education in order to create a new workforce, Nikkei concludes. However, the Lao economy has good potential to embark on a path of reform. Indeed, it should not be forgotten that with a gross domestic product growth rate of 7% for more than two decades, Laos has been one of the fastest growing economies in Southeast Asia for more than two decades through 2019.

Laos and China: closer than ever before

While Laos smiles at Beijing's investments in the country, Vientiane must pay attention to its debts.

Sixty years have passed since the beginning of diplomatic relations between Laos and China and the two countries are increasingly closer: Beijing is currently the most important foreign investor for Laos with almost eight hundred projects underway including highways, infrastructure and high- speed railways to be completed to improve the connectivity of the Southeast Asia State. The growth of Chinese investments in the country has been dizzying. While in 2003 they corresponded to less than 2%, in 2018 these had grown to 79% of total foreign direct investments in Laos.

Trade between the two countries has also seen a sharp increase in recent years: in 2019, compared to the previous year, trade between Beijing and Vientiane increased by 17%. A fundamental role in increasing economic relations between China and Laos is played by the Belt and Road Initiative (BRI) program. Laos plays a strategic role for China to allow direct and faster access to the countries of Southeast Asia, primarily to convey its products to Thailand. For these reasons, Beijing is investing in the construction of high-speed railways to allow greater and faster connectivity between the province of Yunnan and Vientiane.

At the moment, three projects regarding the construction of high-speed railways are particularly important for Laos: the Boten - Bokeo section of about 180 kilometres, the Vientiane - Pakse section and the railway that will connect Boten and Vientiane, the most ambitious and expensive project, part of BRI plan. While the Vientiane - Pakse railway will allow greater connectivity with the south of the country, allowing people to reach Pakse in seven hours compared to the ten hours it currently takes, the Boten - Bokeo project would allow Beijing to have rapid access to the north border of Thailand, in order to transport Chinese products to Bangkok more quickly. Finally, the rail section between Boten and Vientiane is almost ready, which cost six billion dollars and is the most expensive project ever built in Laos. The high-speed railway will be over 400 kilometres long, joining another railway segment already present in China and connecting the Laotian capital with Kunming, the capital of the Yunnan province. This project will not only allow a faster passage of products destined for the Laotian market but will also increase the number of Chinese tourists coming to Laos, as had already happened in the past when Boten was known as the "Golden City" due to the presence of numerous casinos that attracted Chinese and Thai tourists.

Beijing's interest in investments in Laos has meant that today the relationship between the two countries is rosier not just from a commercial but also from a political point of view. Vientiane is increasingly linked to Beijing, so much so that it recognizes and supports its political choices (it is no coincidence that last year, at the United Nations Assembly, Laos supported the national security law implemented by Beijing in Hong Kong). A further sign of closeness between Vientiane and Beijing came this spring, with the election of Khemmani Pholsena - the former Minister of Commerce of Laos and childhood friend of the leader Xi Jinping - to the role of advisor to President Thongloun Sisoulith. However, what seems to be a consolidated relationship aimed at increasing the economy of one of the poorest countries in the world (with the pandemic crisis, among other things, the country's unemployment rate has reached 25%) could hide a pitfall: the so-called debt trap. Laos' debts towards China correspond to over 400 million dollars, while the total amount of the country's debts corresponds to over 60% of GDP: if Vientiane finds itself insolvency, it could become a pawn for Beijing which it would have the right to redeem itself on the small state by obtaining control of some infrastructures in the country, as already risks happening elsewhere.

The sustainable independence of Laos

Drought and debt force the country of the 'Million Elephants' to rethink its development strategy

The Lao People's Democratic Republic (PDR) is the only ASEAN member state that does not have a direct outlet to the sea: in fact, the small mountainous country borders with China and Myanmar to the north, Vietnam to the east, Cambodia to the South and with Thailand to the West. While landlocked Laos grapples with limited access to the main maritime trade routes and little attractiveness for foreign investors, its strategic position draws the attention of great powers. Indeed, the PDR, the heir to the ancient Kingdom of Lan Xang, the 'Million Elephants', is increasingly crucial in the "battle for hearts and minds in Southeast Asia”.

These lofty statements reflect fairly well the situation of Laos throughout the past three centuries. Following the dissolution of the Great Kingdom into smaller vassal states of Burma (Myanmar) and Siam (Thailand), Laos was reunified only at the end of the 19th century, when it became a French Protectorate. When the country finally got rid of its colonial masters, the outbreak of the Vietnam War wretchedly compromised the country’s hardly-won independence. During the period 1959-1975, the Kingdom of Laos was the scene of a bloody proxy war between the United States and North Vietnam, which led, eventually, to the victory of the Laotian Communists and the creation of the People's Republic.

The first twenty years of independent Laos were strongly marked by the 'special relationship' between Laos and Vietnam celebrated and sanctioned in the Treaty of Friendship and Cooperation of 1977. Only the end of the Cold War and the dissolution of the Soviet Union allowed Laos to break its economic and diplomatic isolation and to restore ties with its other neighboring countries. The first Thai-Lao Friendship Bridge, inaugurated in 1994 thanks to Australian funding, well represents the change. 

The Mekong River, the most famous 'Mother of Waters' in Southeast Asia, played a crucial role in reviving the Laotian economy and re-connect it with the ASEAN, which Laos joined in 1997. Between 1994 and 2019, the country's GDP grew by an average of 7% per year, thanks to a gradual opening to foreign trade and the exploitation of its rich mineral resources. Most notably, the Laotian government invested heavily in the hydroelectric sector, building dozens of dams along the Mekong and its tributaries with the aim to become the new “Battery of Asia”.

While downstream states initially opposed the project, especially wary of Chinese involvement in the project and potential impact on their economy, their individual interests eventually prevailed. Thailand, for instance, is the main destination of the 6457 MW of energy produced in Laotian hydroelectric power plants and intended for export. 63 plants are already operational, whereas 37 more will be added in the foreseeable future. Ironically, while Vietnam is traditionally the staunchest opponent of the dams, construction also involves prominent Vietnamese companies (Vietnam itself would be the second recipient of Laotian exports!). While environmental NGOs and local committees have always spoken out against the project, more recently, several international organizations have highlighted the limits of a growth model based on the indiscriminate exploitation of natural resources.

The Asian Development Bank, for example, placed emphasis on the structural weaknesses of the energy sector, which offers a very limited number of jobs and lacks connections with the rest of the economy. In fact, about 75% of the Laotian workforce is employed in agriculture, heavily affected by the record drought which last spring brought the economies of the lower Mekong to their knees, due to the compounded effect of climate change and Laotian and Chinese dams. The global crisis of Covid-19, which wiped out the earnings of the tourism industry and significantly reduced the amount of foreign remittances, contributed to a sharp fall in tax revenues and foreign currency reserves. The choice of Fitch Ratings to further downgrade the Laotian economy, from B- to CCC, demonstrates the concern of international creditors about the country's ability to repay its debts (without falling into the ‘debt trap’) .

Within the 8th National Socio-Economic Development Plan 2016-2020, the Laotian government acknowledged the need to create a 'green' agenda that guarantees sustainable and inclusive development for the country. Political will alone, however, is not enough for reforms to succeed: there must also be effective institutions, modern infrastructures and, of course, appropriate investments. The next five-year plan 2021-2025 will hopefully fill the gap. According to a first draft circulated by the Ministry of Planning and Investments, the 9th plan set one new goal: strengthening international cooperation. For once, the government seems to agree with Kishore Mahbubani: "the wisest thing Laos can do to protect its independence (...) is to become one of the ASEAN champions".

By Francesco Brusaporco

The new China-Laos railway

The new infrastructure will be completed by the end of 2021, and it will bring substantial changes to trade in South-East Asia.

The project accords perfectly to the Laotian Government’s strategy to turn Laos from a landlocked country into a land-linked hub. The rail is the longest one outside China in Asia, linking China to Thailand through Laos: a 414-km railway, that will run from Boten (border gate between northern Laos and the Chinese province of Yunnan), to Vientiane (Laos’ capital, at the border with Thailand). Works began at the end of 2016, but unavoidable delays occurred due to the Covid-19 emergency. Despite this, operations re-started after only 23 days, allowing the project to stay on track as initially scheduled.

Economic and geopolitical advantages of the new railway will be remarkable for both China and South-East Asia. For the first time ever Yunnan, already a crucial region for connecting China and ASEAN, will be linked directly to Thailand by land. The railway will allow Chinese products to reach not only Laos and Thailand’s markets, but also those of Malaysia and Singapore. This will be possible without relying on costly air or naval transport anymore. A logistic operation that has no precedents for China, and that will allow the country to expand more than ever in the region. The project is part of the China’s Belt and Road Initiative, but it will not be devoted only to the exchange of goods and people. On the contrary, it will also be an important health support for developing countries. More cooperation in the health sector, possible thanks to the China’s Health and Silk Road project, will be offered through substantial aid to those ASEAN countries more hit by the pandemic and by the lack of adequate healthcare facilities.

According to the World Bank, the new railway could dramatically contribute to the development of the Laos economy, if followed by meaningful reforms. The elections of new leaders and of a new politburo, scheduled for early next year at the Party National Congress of the ruling Lao People’s Revolutionary Party, are likely to bring the right momentum to introduce those reforms.

From new infrastructures comes a new kind of traffic, not only in goods and people but also for mere transit. Laos industries should not waste this moment: if they will be able to seize it, they will create a new economic corridor under a high-quality logistic planning. In fact, another report from the World Bank assigns Laos a good score in the section “Ease of trade across borders”. With the right strategic approach by public and private sector, several experts believe that the new railway will represent an important incentive to diversify Laos economy, still dependent from a limited number of commercial sectors.



Article edited by Valentina Beomonte Zobel.