Can Laos de-risk from China on its own terms?

With Laos’s developmental model of China-backed statist-socialist industrialisation facing structural risks, Vientiane is seeking to de-risk — on its own terms.

Since the early 2000s, Laos has pursued development based on foreign investment into natural resources and infrastructure. Reflected in a series of catchy state slogans — ‘Battery of Southeast Asia’, ‘Turning Land into Capital’ and ‘From Land-locked to Land-linked’ — dozens of major projects have been financed through complex public–private partnerships, especially in energy and infrastructure. Surging resource exports propelled rural development and poverty reduction. Yet these were not without costs.

By 2019, Laos had accumulated an estimated US$5.25 billion in Chinese loans to fund vast projects, including the Laos–China Railway and the Nam Ou Hydropower Cascade. Laos’ public and publicly guaranteed debt peaked at 115.7 per cent of GDP in 2022, before declining to an estimated 94 per cent by the end of 2024. Most infrastructure financing flowed back to Chinese construction firms, while repayment risk remained with the Lao government. State-owned enterprises accumulated heavy debt burdens, with Électricité du Laos in particular becoming a source of macroeconomic instability.

Low foreign reserves left the Lao Ministry of Finance vulnerable to external shocks. This shock arrived in 2020 with COVID-19. A sudden stop in foreign currency inflows sparked a currency depreciation–inflation spiral. Ratings agencies restricted access to international credit and growth stalled. To avert a formal debt restructuring, Laos relied on a renminbi swap line and repeated repayment deferrals from China, while intensifying resource extraction. Inflation has since declined from 41 per cent in February 2023 to single digits, the Lao kip has stabilised and estimates put growth at 3.7–4.5 per cent since 2023. Still, Laos’ risk profile remains high. Including the US$560 million deferral in 2025, cumulative deferred debt service to China, since 2020, totals US$3.23 billion (around 19 per cent of 2025 GDP).

Policies before and since the shock have intensified environmental decline. Hydropower dam proliferation has degraded many of Laos’ and the Mekong region’s major waterways. Inflation has driven renewed deforestation as farmers rush into cash crops. With mining investments expedited, overloaded ore-carrying trucks have severely damaged provincial road infrastructure, while new gold and rare earth mines continue to pose major risks to Mekong Basin ecosystems and communities. Though important renewable projects are coming online, Laos is also advancing coal-fired power generation to sustain export growth.

These conditions are not idiosyncrasies but arise from risks associated with what we have called Laos’s ‘political economy of statist market socialism’. According to this framework, the Lao People’s Revolutionary Party (LPRP) directs strategic economic sectors to pursue developmental objectives — utilising foreign investment in the absence of domestic capital. Laos’ natural resources function as ‘regime resources’, converting natural wealth into institutional capacity and political durability.

Party-led modernisation narratives buttress these projects while statist rule-of-law reforms reinforce compliance and stability. Though the Laos party-state invites international donors and experiments with sustainability initiatives, it tolerates environmental degradation and maintains opaque governance arrangements that generate rents.

It is in this context that Laos seeks to de-risk.

Since the onset of the crisis, Laos has depended on Chinese financial support. But in late 2024 the LPRP also began to promote the concept of a ‘self-reliant economy’ alongside its enduring goal of building socialism. This approach, formalised at the January 2026 Party Congress and elaborated the following month, seeks to reduce debt, enhance sovereign resilience and improve transparency and the business environment. The government’s self-reliant economy vision underpins the six per cent annual GDP growth target of its 10th Five-Year National Socio-Economic Development Plan.

This strategy also implies the geoeconomic balancing of China through diversification. Laos is seeking increased investment from its fast-growing ally Vietnam, while revitalising ties with Russia — culminating in seven wide-ranging agreements signed in Moscow and a defence cooperation roadmap. Though partnerships with Western countries, Japan and South Korea continue, Laos placed greater emphasis in 2025 on socialist allies and Russia.

While ongoing institutional change and innovation are key features of statist market socialism, the enduring task of building socialism shapes this innovation. This explains the selective adoption of IMF recommended neoliberal reforms, with the government’s debt crisis response signalling the imperative of statist market socialism.

While consistent with Laos’ revolutionary history and ideology, this approach is not without cost. In November 2025, Laos priced a US$300 million sovereign bond at 11.25 per cent, a steep premium reflecting investor concerns over prior negative-pledge violations with hydropower assets and uncertainty regarding the ongoing reliance on opaque Chinese debt deferrals.

One may question Laos’ capacity to meaningfully delink itself from China on these terms. In 2024 Beijing still accounted for about 66 per cent of Laos’ foreign direct investment inflows, deepening geoeconomic dependency while supporting the LPRP’s resistance to structural reforms towards more transparent, externally accountable governance. Though the government seeks multilateral development bank support, key decisions around budget lines, management of state assets and debt arrangements are still handled behind closed party doors.

The political economy of Laos, combining pragmatic international cooperation with its enduring socialist principles and identity, leads to a partial and selective management of financial and ecological risks — on the LPRP’s terms. Yet structural constraints, including a significant debt overhang and limited alternatives to Chinese finance, remain considerable. The government’s plan to create a self-reliant economy and return to high growth will test its capacity to delink from China and its de-risking strategy.

This article is originally featured on the East Asia Forum. 

Article by Keith Barney, an Associate Professor at the Crawford School of Public Policy, The Australian National University, and Simon Creak, an Associate Professor at the National Institute of Education, Nanyang Technological University.