By Joshua Simonidis & Ashling Stout

Thanaleng Train Station outside Vientiane, currently the only major railway station in Laos. A joint Laos-China high speed rail line is in development, yet concerns over cost remain. Source: Wikimedia user Hiroo’, used under a creative commons license.

On September 25, China reiterated its willingness to work with Laos to build a high-speed railway linking southern China’s Kunming to the Lao capital Vientiane. The proposed railway would eventually form a part of a greater network across Southeast Asia, linking southern China to Singapore at its conclusion. Both Lao and Chinese statesmen have lauded the concept as highly beneficial, but concerns remain over its viability due to cost.

China is Laos’s second largest source of foreign investment and one of its largest aid donors, with its largesse particularly visible in areas that directly benefit Chinese business and trade. In return, Laos provides China with access and a certain degree of political support in the region. As a result, China has become an indispensable partner to Laos. The underlying tenet of this relationship is that China supplies Laos with aid that comes without the burdensome human rights, labor, and transparency requirements of western assistance.

Laos’s increasing dependency on China is symptomatic of its chronic revenue shortage. Laos is mountainous, land-locked, and has limited high-value natural resources. These factors make development difficult and force Lao leaders to pursue revenue wherever they can find it. Laos’s continued pursuit of highly controversial dam projects on the Mekong is indicative of this dynamic. And so is its relationship with China.

The Kunming-Vientiane railway would benefit both countries. Beijing is anxious to complete the railway because it would be a crucial link in its planned rail network across Southeast Asia, enabling better access to Laos’s and the wider region’s resources and markets for Chinese goods. The Lao government views the railway as essential for economic growth. It would lower transportation costs through the country’s rough terrain, and its eventual expansion into a wider regional network would enable easier access to ports in neighboring countries.

Despite the potential benefits, the cost for Laos is too great to make the project feasible. In order to finance its section of the rail line, Laos would have to borrow approximately $7.2 billion from China. This equates to almost two-thirds of Laos’s 2013 gross domestic product. The country does not have an economy that is strong enough or dependable enough to pay off a loan of that magnitude with interest. The Asian Development Bank finds the project “unaffordable” for Laos. China gains significant influence from lending, so it has no qualms about lending to developing countries that already owe significant amounts of money to China and have limited ability to pay their loans in the foreseeable future.

Negotiations on the deal have been slow and its final outcome remains uncertain, despite statements to the contrary by Lao leaders. It will be important to watch the railway’s progress and its impact on the Laos-China relationship, especially over the next year. If the project goes ahead, it will more intricately bind Laos’s economy to China and deepen Beijing’s influence in Vientiane. This will be of particular concern in 2016 when Laos becomes chair of ASEAN. China will likely pressure Laos to use its influence as chair to stymie discussion, or at least consensus, on sensitive issues like the South China Sea, just as China did through Cambodia during its chairmanship in 2012.

Mr. Joshua Simonidis is a researcher with the Sumitro Chair for Southeast Asia Studies at CSIS. Ms. Ashling Stout is a researcher with the Freeman Chair in China Studies at CSIS.