China’s Economic and Military Involvement in Laos

Laos is considered as a key player in China’s outreach to Southeast Asia and the widening of its influence in the region. Economically, it is important to China not only due to the lucrative hydropower industry but also as a source of underdeveloped resources, including minerals and rubber. With growing Chinese investment and economic influence, both countries have also cemented closer military ties.

As a landlocked country, Laos has been a keen participant in the OBOR initiative. While Laos gets Chinese loans for OBOR projects, it provides political support on the Taiwan and other issues while also providing access to Laotian resources and transport connectivity to South-East Asian markets.ⁱ In 2020, China was the second largest trading partner and largest export destination of Laos after Thailand with a trade volume of around USD 3.6 billion. China has become the largest foreign investor and aid provider in Laos. From 2005 to 2019, China had over 865 projects in Laos, with a total investment of over USD 11 billion.ⁱⁱ Resource-related sector, such as mining and hydropower constitutes more than 70% of total Chinese investment in Laos.ⁱⁱⁱ China is now diversifying its investment in other areas like real estate and transport. The USD 7 billion, Boten-Vientiane high-speed railway is the biggest planned Chinese investment in Laos.

China is also the biggest agricultural investor in Laos. As of October 2020, a total of 239 Chinese companies had invested approximately USD 590 million in the Laotian agriculture and forestry sectors.^iv In 2018, Laos earned around USD 600 million from the export of agriculture produce, rising to USD 943 million in 2020, with 80% of produce being sold to China.

China is a major player in Laos’ ambitious hydropower plans and involved in about half of Laos’ hydropower projects. Laos currently exports an estimated 70% of its hydropower and electricity to its neighbours which accounts for roughly 30% of all Laotian exports.^v

Two state-owned Chinese banks ‘Industrial & Commercial Bank of China Ltd.’ and ‘Bank of China Ltd.’ have opened their branches in Laos. China Development Bank also established its representative office in Vientiane and is providing financial support in the fields of hydropower, power grid, mining development, and financial cooperation. ICBC Limited Vientiane Branch is first bank in Laos to make settlements in Renminbi.^vi In 2020, People's Bank of China and Bank of Lao PDR signed an agreement on bilateral monetary cooperation to enhance the use of local currencies in trade and investment. ^vii

In 2020, Laos’s sovereign debt was around USD 12.6 billion, equivalent to around 65% of its GDP, in which almost half of the public debt was held by China alone. In order to reduce the debt burden, Laos has taken measures which include converting debt into capital, selling state assets, and selling shares in state enterprises. Transfer of a majority control of state owned Electricite du Laos (EDL) to a Chinese firm is a step in this direction. Similarly, Laos granted a 300-hectare land concession to a Chinese company when it failed to pay back a USD 80 Mn loan from China for the construction of a stadium for the Southeast Asian games.^viii

China is the second most important defence partner and arms supplier to Laos after Russia. However, lack of transparency in Laos’ military expenditure and non availability of reliable data make it difficult to ascertain the exact level of military cooperation between two countries.^ix In addition to military weapons & machinery, Laos has acquired helicopters & light transport aircraft and placed an order for ‘Air Defence Systems’ from China.

Laos has also acquired China’s Tianlong 6 (short-range air defense missile system) which only came to notice after it appeared during Laos’ Armed Forces 70^th anniversary parade in 2019.^x As per recent reports, China has offered its Chengdu J-10C multi-role fighter aircraft to Laos.^xi China has deployed a four-member team at Kaysone Phomvihane Academy of National defence (KAND), Vientiane and conducted regular military exercises with Laos armed forces. In Mar’ 2020, China also sent PLA military medical teams to Laos to fight COVID-19.

Laos is currently facing a persistent current account deficit, falling foreign currency reserves, and growing public debt. Till 2024, Laos’s debt servicing obligations will remain around USD 1.1 billion higher than its current foreign exchange reserve thereby raising the