China Now Owns a Country, Literally! No Other Country Is as Indebted as Laos, Expert Says

Massive Loans from China have plunged Laos, one of Beijing's closest allies in Asia, into a major debt crisis, raising concerns about the country's future.

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Following a recent revelation by Laos that its foreign bonds have nearly doubled and it needs more time to avoid default, China said it is helping its neighbor reduce its huge debt, Bloomberg reported.

In a written response to inquiries earlier this week, a Chinese Foreign Ministry spokesperson said Beijing has engaged in “mutually beneficial cooperation” with developing countries, such as Laos, which includes providing significant support for social and economic development.

The spokesperson also said: “At the same time, we have done our best to help the countries concerned ease their debt burden.”

The Chinese statement appears to be aimed at calming a situation it may have only created. With more than half of Laos’ $10.5 billion external public debt, China is by far the country’s largest creditor. The small country’s public and state-guaranteed debt stood at $13.8 billion at the end of last year, or 108 percent of its GDP.

Laos has deferred $670 million in principal and interest payments on its $950 million external debt obligations incurred last year. The measures have provided brief respite in recent times, according to previous World Bank statements.

Laos’ public debt is largely due to infrastructure contracts secured under China’s Belt and Road Initiative (BRI). The strain continues to mount for Laos, whose foreign reserves have been depleted by billions of dollars borrowed by President Xi Jinping’s government to finance roads, trains and hydroelectric dams under China’s Belt and Road Initiative (BRI).

Communist Laos first made headlines after it built and opened a nearly $6 billion high-speed rail line with China. While many see the project as the start of a massive infrastructure project that would immediately connect Southeast Asia to the world's second-largest economy, it has also sparked a debt crisis.

In addition to the currency crisis, rising food and fuel prices worldwide have also contributed to the historic weakness of the Lao kip against the US dollar, leading to runaway inflation. If the current economic crisis spirals out of control, the country fears an economic collapse.

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The government has adopted several stabilization measures to stem the crisis, including raising interest rates, issuing bonds and developing debt management strategies in collaboration with the Asian Development Bank. In addition, this has led to a decline in spending on essential needs such as health and education, which may not bode well for the population in the long run.

Experts believe that China's claim that it would help Laos ease its debt burden may be true, given that Laos is one of the few countries where the BRI has proven to be successful. successful modelOther countries could take inspiration from this. According to Beijing's plan, the railway is to connect Laos to Thailand before extending to Malaysia and Singapore.

While China and Laos have forged close diplomatic, economic, and military ties, it is Laos that has literally swallowed up Laos. Last year, William & Mary’s AidData research lab, which tracks China’s loans, calculated Laos’ total debt to China over 18 years.

Brad Parks, executive director of AidDatas, said: “No country in the world is as heavily indebted to China as Laos. This is a very extreme example: Laos went on a borrowing spree and got overwhelmed.”

As Laos sinks deeper into a debt-induced economic crisis, attention has again focused on what Western critics of China have called “debt-trap diplomacy.”

Although China has an interest in helping Laos overcome its debt crisis, or even canceling its debt, there are still concerns that other countries will be burdened by debt owed to China and will demand similar concessions. Beijing has lent about $1 trillion to developing countries, a colossal sum that has radically changed China's position in the world.

The Chinese debt trap

China is known for being the most generous country in the world, offering credit more readily than other countries. But it is also known for being the most severe. Its loans often come at a cost: a dozen developing countries are threatened with economic instability or even collapse.

An Associated Press investigation last year of the 12 countries most indebted to China, including Pakistan, Kenya, Zambia, Laos and Mongolia, found that the amount of taxes needed to pay for gasoline and food, keep schools open and provide electricity has been rising steadily to repay the debt. It is also depleting the foreign exchange reserves that these countries rely on to cover the interest on those loans.

The crisis that hit Sri Lanka is a perfect example. In 2022, as its foreign exchange reserves began to decline, the country experienced its first default. Last month, the South Asian country announced that it had finalized restructuring agreements totaling $10 billion, including with China’s Exim Bank and an official creditors’ committee of bilateral lenders.

The AP noted that China's reluctance to forgive its debts and a lack of transparency about the amount and terms of the loans have prevented these countries from receiving financial aid from other nations. This often leaves these indebted states with little choice, analysts say.

There have also been allegations that China has devised a malicious strategy to force these borrowers to repay their debt. Borrowers are reportedly being forced to deposit money into secret escrow accounts, prioritizing China’s payment over other creditors. However, EurAsian Times has not been able to verify these claims.

Over the years, critics have accused China of using debt instruments to “trap” vulnerable countries that need credit on less restrictive terms. If the country cannot repay the loan, critics say Beijing is forcing it to divest key infrastructure assets that could help Beijing achieve its geopolitical ambitions and help China establish a permanent presence in the trapped country.

This was particularly highlighted when China obtained ownership of the Hambantota port in Sri Lanka.

China, however, continues to reject these allegations as anti-China propaganda from the West. Some analysts have even claimed that this is a neo-colonial policy by Chinese President Xi Jinping.

Human rights groups and activists say Laos has had to make concessions, including on its sovereignty, to please Beijing and secure financial aid.

In exchange for not having to repay the loans, observers say China now has some control over Laos' electricity infrastructure. Chinese security forces and police can now operate in the country and provide security for the new railway line.

However, if Chinese statements are to be believed, the country is making efforts to ease the debt crisis in Laos. In a recent written communication, a Chinese Foreign Ministry spokesperson denied accusations of “debt trap diplomacy,” calling them US rhetoric aimed at sabotaging Beijing's collaboration with developing countries.

It cannot fool the majority of developing countries, the spokesperson said in the written reply.