Beijing pulls Laos into its orbit

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Asia Times Online 25 October 2006

By David Fullbrook 

VIENTIANE - Across craggy northern Laos, thousands of Chinese laborers tend fields, many of them covered with the plastic tunnels of modern market gardening. Traditional farming in the lush and once-remote valleys of northern Luang Nam Tha and Oudomxay provinces is increasingly giving way to commercial agriculture driven by demand, money and labor from neighboring China.

The first crops, such as corn, bananas and sugarcane, will soon be harvested, either from fields leased by Chinese firms, or to meet contracts made with Chinese or Laotian traders seeking to fulfill Chinese orders. Chinese drivers will take large trucks rimming with produce along roads, often new or rebuilt with Chinese money and by Chinese engineers, to the wholesale markets, feed factories, distilleries and kitchens of southern China.

A study released this year by the Lao-Swedish Upland Agriculture and Forestry Research Program reported that Oudomxay province exports 90% of its primary cash crop, corn, to China. Cornfields now cover 13,000 hectares of Oudomxay, against 3,000 hectares in 1996, and are forecast to produce 100,000 tons this year. All indications are that fields and harvests are set to increase.

Last year Chinese investors signed 15-year contracts to buy sugarcane covering 40,000 hectares and cassava across 60,000 hectares in Luang Nam Tha province, reported the Vientiane Times, a government-run newspaper. If production of each staple hits 1 million tons by 2008, they promise US$3 million in investment for new processing factories and a research center.

China's booming economy can't seem to get enough agricultural staples such as corn, cassava and sugar. As ever more Chinese farmland is lost to factories, homes, deserts and pollution, Chinese firms are increasingly placing agricultural orders abroad, a major change that began in the mid-1990s and has since intensified. Before, China's leaders believed importing food, especially staples, was a strategic folly.

While China places big contracts with agricultural giants such as the United States, Australia and Brazil, even relatively small orders cause big economic ripples for poor neighboring countries such as Laos. Furthermore, rapidly changing trends and tastes among China's increasingly wealthy urbanites are having consequences for Laos and other Southeast Asian countries.

One such trend is growing concern among regulators and increasingly wealthy urbanites about crops saturated with agricultural chemicals. Traders and food processors in China's Yunnan province are expecting orders to increase for Laotian crops because most farms there use far fewer chemicals than their Chinese counterparts, preferring traditional organic farm-made fertilizers and pesticides. It's a situation ironically threatened by some Chinese investors, who supply chemicals along with seeds when they contract for produce in Laos.

Corn imports from Laos have risen so fast - last year amounting to 40,000 tons - that they now draw Chinese tariffs. In response, Beijing is now moving to ease or eliminate tariffs to encourage trade with neighbors. China has this year added 91 products to the 238 already on a preferential tariff treatment list for Laos, of which 220 are tariff-free under an initiative that Shi Guangsheng, China's minister of trade and economic cooperation, announced when meeting ministers from Myanmar, Cambodia and Laos in Phnom Penh in November 2003. Remaining tariffs seem unlikely to dampen imports given strong demand and the often uncounted petty trade, mostly among highland peoples with kin and clan on either side of the porous and largely unfenced Sino-Laotian border.

Beijing is also driving expansion of commercial farming with a program fostering demand for cash crops to help wean highland farmers from growing opium poppies. It works by exempting from tariffs imports by registered Chinese firms. This year's 40,000-ton tariff-free import quota for corn, for example, was granted to Jingu Border Trade Cooperation Co, one of 10 companies registered with the program.

Booming car sales in China are also fueling new economic activity in Laos, which have made China the largest market for Laotian rubber. Unless scientists fiddling with DNA eventually produce rubber trees that can thrive in colder climates, China's rubber plantations in Hainan province and parts of Yunnan will never meet the country's surging demand.

As such, Laotian highlanders are planting rubber trees on their family land plots, turning to relatives across the border for advice, and merchants there for seeds, grafts and tapping tools. Chinese firms are also moving into rubber plantations as far south as Vientiane province, where the Junnan Power Biological Products Group is planning to spend $15 million to lease 2,500 hectares for rubber and build a processing factory.

Small economy, big money
Plantations, farms, factories and markets total to 197 officially approved projects worth $401 million, including 20 valued at $39.5 million from October 2004 to May 2005, according to official statistics. And Chinese investments will likely balloon further if some of the dozens of firms now prospecting for minerals eventually proceed with mining operations and processing plants.

Significantly, not all projects make it into the official count. Some economists suspect projects are purposely valued below the $1 million threshold because provincial governors have approval authority, avoiding the bureaucracy and costs of dealing with officials in Vientiane. Moreover, 2005 saw agreements reached for the Chinese-funded $168 million Nam Ngum 5 and $150 million Xepon 3 hydropower dams.

On the other hand, many plans also fall by the wayside. The World Bank estimates that less than half of approved investment actually goes forward. Still, Chinese investment is affecting more and more Laotian people over an increasing geographical area because projects tend to be small and labor-intensive, such as farming, plantations and stores.

Trade is clearly accelerating, though for the time being in China's favor. In 2003, China accounted for 2.2% of Laotian exports worth $10 million and 12.8% of imports valued at $108 million. Official statistics are probably only half the story, because petty trade, informal exports such as traditional-medicine ingredients, and smuggling occur beneath the official radar. Some analysts predict China may well be matching Thailand for domination of trade with Laos.

As a consequence of this tide of Chinese investors, traders and workers, Chinese 100-yuan ($12.60) notes are often used in place of the national kip currency in northern Laos. Chinese traders are opening stores run by Chinese shopkeepers seemingly wherever there is a road and town. Trucks carrying Chinese goods top up stocks monthly, a business only made easier as the Internet and mobile phones began reaching smaller Laotian towns and villages.

Every major town now has at least one Chinese market, including the capital Vientiane, where Chinese entrepreneurs run many Internet cafes, stores and restaurants. "There are many at this time; they trade and open shops," said a Laotian taxi driver asked about Chinese migrants in the city.

That is a marked change even from a few years ago. Then there were no spicy Sichuan restaurants downtown; now there are two, suggesting growing links with that province, not to mention a sizable Chinese community. Meanwhile shops, guesthouses and businesses have been adding Chinese to their Lao and English signs and menus. Weathered flyers, printed in an Internet cafe or written in cursive Chinese, are glued haphazardly to alley walls and side streets advertising labor or services for migrants.

A modern commercial complex is being built in Vientiane specifically targeting Chinese investors and traders. Ting Kua Chieng, from the industrial powerhouse of Zhejiang province, launched an $18 million Lao-Chinese Friendship Center in August comprising a hotel, trade center and market targeting Chinese under the bilateral trade and investment framework. Ting told state-owned KPL News that four-fifths of goods in the market would be sourced from China.

Chinese commercial interests, of course, have political parallels. Chinese and Laotian politicians and officials meet regularly, with then-president Jiang Zemin visiting in 2000, followed by Premier Wen Jiabao in 2004. China's embassy, one of the largest missions in Vientiane, exercises considerable soft power, overseeing the doling out of loans and aid amounting to $1.17 billion between 1989 and 2005, reports the Committee for Laos-China Cooperation.

Chinese-financed projects include the prominent Lao National Culture Hall, scholarships and training, developing e-government, building hospitals, a Chinese-language radio station, upgrading telecommunications infrastructure, and extensive strategic road building from Yunnan into northern Laos and beyond. Of equal long-term significance, Yunnan province is offering to help Vientiane draft the development master plan for northern Laos.

While Japan remains the largest bilateral donor, increased Chinese aid has gone a long way to giving Beijing political influence second only, if not equal, to Vietnam, especially among middle-ranking Lao People's Revolutionary Party cadres and government apparatchiks.

Crossing Beijing's largesse with growing Chinese investment and improving trade prospects is giving the long moribund Laotian economy a much-needed boost, creating jobs and putting more money in the impoverished country's mainly empty pockets. A China-fueled stronger Laotian economy strengthens the ruling communist regime, making it less beholden to the demands of Western donors who demand better governance and improved human rights in exchange for aid.