INTELBRIEF

September 26, 2012

TSG IntelBrief: The Future of China's High-Speed Rail

As of late September 2012, China's high-speed rail network is arguably the world's most ambitious public works project, a 21st-century equivalent of America's Interstate Highway System. China's rail budget for 2012 was quietly increased in mid-July in a sign the government is looking to increase its level of support for the slowing domestic economy. The funding boost signals the resumption of a daunting high-speed rail construction program that ground to a near-halt following a disastrous crash in Wenzhou in July 2011, which led to the deaths of 40 people.

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Balancing Ambition and Reality

Doubts have surrounded the status of the government's plans for high-speed rail links owing to the emergence of alleged graft and safety issues. The railway minister, Liu Zhijun, was removed from his post in February 2011 for a "severe violation of discipline" after becoming the focus of a major investigation into corruption. And the aforementioned Wenzhou rail crash was followed by the imposition of speed restrictions on the rail network, parts of which had been able to run at 350 km/hour (217 mph) — considerably faster than the majority of railway systems in developed countries. These two events provoked widespread domestic debate. It seemed to the public that the unnecessary haste and outsized ambition in rolling out rail projects following the 2008-09 global economic downturn had the dual effect of generating an increasing incidence of corruption while diminishing the focus on safety.   However, the recent hike in the railway budget underscores the reality that China's vision for its high-speed rail network remains broadly intact. First, in early July, the Ministry of Railways had predicted it would invest Rmb406 billion (US$64.4bn) in railway infrastructure during 2012; by late July, however, ministry officials were pencilling in figures that amounted to an increase of 16% (likely as part of the government's efforts to support the economy through infrastructure spending). Second, a new plan for high-speed rail development was released in July by the State Council (China's cabinet). Although greater caution may be exercised in the build-out of the railway system, the government  appears largely undeterred by the events of 2011.   According to the State Council plan, the total operating length of the network will reach 40,000 km (24,850 mi) by the end of 2015, linking up the prosperous eastern seaboard and establishing east-west connections to central and western China. Under the proposals, nearly all cities with a population of more than 500,000 will have access to the national high-speed rail network. The plan follows a "four by four" approach, with four main north-south routes and four main east-west routes. Most of the high-speed lines are passenger-dedicated lines (PDLs), running parallel to or following slightly different routes to existing conventional tracks; other lines are mixed-use passenger and freight lines.   The recent and soon-to-be-achieved advances described below have the potential to make a substantial and positive impact on China's economy as well as on the way of life for a large number of its citizens, especially for those who live outside the country's leading financial, manufacturing, and political centers.   • The four north-south routes have been partially completed, with the Beijing-Shanghai route cutting journey times between China's political and commercial capitals from ten hours on the previous rail system to four hours when high-speed trains went into full operation in June 2011.   • Much of the Hangzhou-Fuzhou-Shenzhen route is already operational as well. When completed, it will connect the Yangtze River Delta with Guangdong province via a mixed-use passenger and freight connection.   • The Beijing-Guangzhou-Shenzhen-Hong Kong route opens up a whole swath of central China, traversing Henan, Hubei and Hunan provinces. It places Wuhan, the provincial capital of Hubei, at the center of the high-speed rail map, which should substantially enhance logistics in the central Chinese city.   • The east-west lines open up the interior of China to the eastern seaboard. The Shanghai-Wuhan-Chengdu route, for example, will connect the rapidly emerging cities of Chengdu and Chongqing with the Yangtze River Delta.   • The Qingdao-Taiyuan route that serves the northern half of China will free up rail capacity for natural resource transport. The line will also connect Shanxi province with the northeastern coast.   • A number of shorter intercity high-speed links are also in place, including the Beijing-Tianjin route — a 30-minute connection between the two cities — and the Shanghai-Nanjing route, where what was once a three hour trip has been cut in half.   Such ambitions are impressive, but uncertainty surrounds the mechanisms for financing these developments. After years of investment, the Ministry of Railways is burdened with high levels of debt. According to official figures, the ministry owed Rmb1.9 trillion (US $301.6bn) in long-term debt at the end of March 2012. It has scaled back investment so far this year in response, spending just Rmb148.7bn (US $23.6bn) on rail infrastructure through June, down by 38.6% year on year. However, it still recorded a loss of Rmb7bn (US $1.1bn) in the first quarter of the year as passenger and cargo traffic slowed. It is unclear at this point how the ministry is to meet the expanded spending targets referenced above, as well as fund broader rail expansion up to 2015.   The extent of the ministry's financing problems was made evident by the government's announcement in May that it would welcome private-sector investment in the railway system, through either bidding for contracts or investment in railway companies. Such investment will be encouraged by linking rail projects with property investments. However, with local media reports suggesting that even state-owned banks have been reluctant to finance rail projects owing to concerns about profitability and sustainability, it remains to be seen how enthusiastically the private sector will participate.   Many of China's high-speed railway projects are already under way and will come to fruition over the next few years with or without private participation. This means they are likely to burden the Ministry of Railways with a considerable legacy of debt. The ministry has raised Rmb38bn in bonds so far this year, and at the end of July it announced plans to issue a further Rmb27bn (US $4.3bn), bringing its outstanding bonds to around Rmb650bn (US $103bn).

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Linking a Nation; Connecting Ideas

According to a World Bank report in February 2012, it is likely that revenue from most of China's high-speed rail lines is already sufficient to cover the immediate costs involved in their maintenance. However, only a few of the busiest lines are generating enough income to service interest payments on debt, and it will be many years before repayment of the loan principal will be feasible. Despite the financial restrictions and other aforementioned challenges, China is unlikely to introduce any drastic measures against what is perceived as a key national program.

The intercontinental railroad made much of United States available to a new generation of Americans in the 19th century, facilitating unprecedented economic growth and opportunities. It also ushered in a profound evolution in the country's demographics and bases of power. The high speed rail system in China has the potential to achieve similar outcomes, but will come with substantial costs at a time when China's once red hot economy is showing signs of stalling. In addition, railways carry far more than goods and passengers; China's high speed rail will transport ideas and intentions that were once constrained to remote areas. As a result, Beijing's ability to judiciously manage the certain costs while enhancing the potential benefits could have a major impact on the country's economic and political future.  

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