By Brenda Goh and Simon Webb
KUNMING, China/VIENTIANE (Reuters) – For the southwestern city of Kunming, China’s plan to extend a high-speed rail link 3,000 km (1,875 miles) south to Singapore is already a boon: pristine expressways, a gleaming station and something of a real estate boom, as young buyers crowd property showrooms.
In Laos, work has yet to start on what should be the first overseas leg of a rail line stretching throughout Southeast Asia. The country, one of the region’s poorest, could struggle to finance even part of the $7 billion cost and has yet to agree financial terms with China.
From Laos, the railway would enter Thailand. But Beijing’s negotiations have soured there as well, in part over financing, adding to a growing headache for China and highlighting the sort of problems Beijing may face as it develops its economic highways beyond Southeast Asia and across Asia under its “One Belt, One Road” project.
The ambitious plan to build land, sea and air routes reaching across the continent and beyondwas announced by President Xi Jinping in 2013 with the aim of boosting trade by $2.5 trillion in the next decade. As China’s economic growth slows, Beijing is encouraging its companies to win new markets overseas.
But across the Southeast Asia border, China is facing the most complex and possibly most significant obstacles to its ambitions, as its neighbors protest what they say are excessive Chinese demands and unfavorable financing conditions.
They have resisted Chinese demands for the rights to develop the land either side of the railway. Beijing says turning a profit on land development would make the rest of the project more commercially viable and allow it to make a greater upfront financial commitment. Myanmar, in addition, had environmental concerns and canceled its part of the project in 2014.
For China, Southeast Asia’s concerns are “going to be the first significant hurdle as they implement One Belt, One Road,” said Peter Cai, a research fellow at Lowy Institute for International Policy in Sydney.
China’s foreign ministry and the Export-Import Bank of China did not respond to requests for comment.
In 2013, all signs pointed to fast completion of the Laos leg. Leaders from both countries agreed to speed up construction – China offered to loan most of the project funds. In November, construction on the line’s terminus in Kunming began.
The 2.1 billion yuan ($325 million) high-speed rail station in Kunming is now monthsfrom opening. Yet, there is no action in Vientiane despite an elaborate groundbreaking ceremony in December.
Without significant help from China, Laos lacks the financial muscle for the project, diplomats said.
It is unclear why China, which has been vying with Vietnam for influence in Laos, could not offer terms acceptable to Vientiane.
Both countries are invested politically in the scheme. China aims to increase its reach and influence in Southeast Asia and Laos says it wants to turn its country into one that is land-linked, rather than landlocked.
“There were very high-ranking dignitaries from both sides at the signing,” said a Western diplomat in Vientiane. “Most people believe it will cost more than $7 billion, and Laos is struggling to even finance $2 billion of that.”
The Laos government did not respond to a request for comment for this story. Diplomats though say the inaction reflected an internal Communist Party rift over how the negotiations with China were handled.
They said a shock decision in January by the politburo to exclude Deputy Prime Minister Somsavat Lengsavad from the top decision-making body in part indicated concern at senior levels that the deal’s terms were too favorable for China.
Somsavat had led negotiations on China-related projects and had faced internal criticism for being too pro-Chinese.
“The terms were good for Laos,” Somsavat told Reuters. Construction was delayed because Laos was still “researching some details” and because of local opposition of land issues.
Holding the ground-breaking ceremony on Dec 2 also raised eyebrows in the leadership because the date clashed with celebrations marking the 40th anniversary of the founding of the Laos People’s Democratic Republic, diplomats said.
With Somsavat out of the government “moves internally by the Laos government have been to renegotiate the terms of this rail agreement,” a diplomat said.
China has offered at least $30 billion in loans and credit lines for projects. Zhao Jian, transportation professor at the Beijing Jiaotong University, said China offers concessionary loans of between 2 percent and 7 percent, so any country pushing for cheaper loans was being “unrealistic”.
Still, infrastructure projects like these need to be subsidized, said Kamalkant Agarwal, the head of commercial banking at Thailand’s Siam Commercial Bank.
“You can build these projects if you have a government or Santa Claus to pay for it,” he said. “But otherwise, making these projects profitable is a huge challenge.”
After failing to bridge gaps on financing, investment and costs, Thai Prime Minister Prayuth Chan-ocha told Chinese Premier Li Keqiang at a meeting in Hainan in March that Thailand would go it alone on financing and for now build only part of the project. The Thai line would stop well short of the Laos border.
“They will have to invest more because this is a strategic route that will benefit China,” Thai Transport Minister Arkhom Termpittayapaisith told Reuters earlier this year. Thailand refused Chinese requests to develop land along the railway route.
“I have said since day one with China, that there will be no offer on land rights,” Arkhom said.
Thai finance ministry sources said the country could secure funds from Japan at much lower rates. Japan is Thailand’s biggest investor but also a country jostling with a more assertive China for influence across Asia, so Beijing would be wary of this idea.
“The ministry does not want to be condemned for borrowing an expensive loan compared with other options to support this project,” said a Thai finance ministry official who attended some negotiations with China.
Some Chinese local officials, for their part, see the delays as Southeast Asian dithering.
“We are the face to Southeast Asia,”said Sun Xiaoqiang, vice-director of the Kunming Investment Promotion Board.”Of course, we all hope they will build faster.”
The gap between China and Southeast Asia is clearest on the streets of Vientiane and Kunming.
Hundreds of Chinese firms operate in Laos, including Wan Feng Shanghai Real Estate Company, which is building a $1.6 billion project to supply Chinese expatriates with condominiums and shopping centers.
But the Laotian government has invested little in new rail and roads.
Billions of dollars have poured into Kunming, including the district surrounding the new rail station – described by the World Bank six years ago as a “ghost town”.
“One Belt, One Road is good for Kunming,” said Jin, a teacher, who only wanted to give his surname. “(Those countries) have a lot of issues over politics and governance. China is ready, but Southeast Asia isn’t.”
(Additional reporting by Pairat Temphairojana in BANGKOK; Editing by Clara Ferreira Marques and Neil Fullick)