Do China's High-Speed Rail Investments Make Sense?

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Macroeconomics

China has embraced the high speed train (trains that travel at over 250 km/hr) far more enthusiastically than any other country. The current 7,531 km (4680 miles) of high speed track is already more than the rest of the world put together, according to the FT, and under current plans the central government has authorized a high-speed network that will reach 16,000 km by 2020 at a cost of some Rmb 4 trillion ($600 billion) during the next five-year plan alone. The FT reports this figure is expected to account for more than half of all global railway spending during that period, according to World Bank estimates. Even as part of the current stimulus plan, the network is expected to reach 13,000 km by 2012.

But critics are beginning to be heard even within China. One article points out that bullet train services, such as the 1,000 km Wuhan to Guangzhou connection that opened this year, are operating at less than half their full capacity and will never make enough money to repay the large bank loans used to build them. A report submitted by the China Academy of Science to the State Council, urged a rethink of the emphasis on (among other massive infrastructure investments) the bullet train expansion program. One of the concerns expressed in the report is the unsustainable level of debt and that the breakneck expansion has not been properly thought out, leaving airports, bus services, subways and highways not connected depriving the investment of efficiency gains even before the massive debt burden is taken into account.

Does this massive investment in cutting-edge rail technology represent a major opportunity for western rail firms? As an FT article points out, in 2002 China invested nearly $5.4 billion in the segment of the high-speed market in which foreign companies compete carriages, signaling equipment and other high-tech track components and foreign companies captured about 70 percent of that. Today China invests as much as $23 billion in the segment, of which foreign companies account for only 15-20 percent, earning roughly the same as eight years ago, according to industry figures. As a result of a highly successful drive to force foreign companies to transfer technology in exchange for access to earlier projects, China now builds Japanese and European trains in all but name.

But back to the economics. As other countries look on with envy at the shiny new trains, academics — even in China — ask, does it make economic sense? The article quotes Zhao Jian, a professor at Beijing Jiaotong University who favors conventional rail rather than high-speed projects. “This high-speed program is a political project with little economic value, he says. “The government just wants to have the biggest and fastest train set in the world. The railway ministry accounts for as much as 10 percent of all outstanding debt in the country, according to World Bank estimates. Chinese analysts say the proportion of railway construction funded by debt has increased from under 50 percent in 2005 to more than 70 percent last year. That would be fine if the economics were sound and the traffic was sure to generate enough revenue to pay it back. But Mr. Zhao is not so sure. “This is a real debt crisis building up for the government and it is going to break at some point, he said. It sounds not a little like the great American railway building boom of the 1800s, but in this case it will doubtless be Beijing that eventually steps in to pick up the tab, not bond holders.

–Stuart Burns

Comments (9)

  1. Jaay says:

    With all due respect to the cited academics (FT article has some factual and logical errors which automatically discounts it as anything useful) how doesn’t it make sense to build HSR in what is some of the densest populated areas in the world with rail being by far the most important and popular mode of transport (unlike the US)? Sorry but that is just silly. If there is a country where high-speed rail DOES make perfect sense, it is China. I am not even talking of wider benefits to the country for having fast and reliable trains. The against arguments seem to be extremely weak and based on imagination rather than logic.

  2. Stuart says:

    Thanks Jaay, the most logical argument against is if it doesn’t pay. If the cost of the investment is not met by the revenue generated at a reasonable rate of return. I would agree (being a European -:) ) that this could be assessed after some form of state subsidy as a reflection of the greater good to society that rail has over road or air transport – that is a fair argument. The fear in China is that it will never pay back even after state subsidy. However as a true assessment of the levels and sources of subsidy is never likely to take place in China it is probably an academic question. The broad point is whether HSR regardless of cost is a good investment, I am a supporter of HSR both for China and elsewhere but you can have too much of a good thing and arguably some of China’s HSR investments will be financed with too much debt and not enough equity to ever break even.
    Thanks for reading and commenting on the blog, you make a good point.

  3. John Dough says:

    Jaay says, “If there is a country where high-speed rail DOES make perfect sense, it is China.”

    It would appear there is something wrong with your premise. Evidently, based on evidence now becoming public, there is NOT a country where HSR makes sense…including China. Why do we have to relearn thier lesson?

  4. Fred says:

    Actually, the analysis needs to incorporate China’s national security needs. The government views high speed rail as a necessary means to deploy the army and therefore to project the State’s authority. For this reason alone, I imagine, the case for rail is very strong. Besides food, China’s main issue is social unrest.

  5. Chli says:

    Does $700 billion giving to wall street to balance the book while Americans are hunger for jobs make sense? No! Does sending people to the moon make sense ? Yes! Vision we must have for the strategic planning.

  6. Hammy says:

    Seems the FT report really has a long term influence, even if the Chinese Ministry of Railways responded to this report saying most of its claims were false.

    But let’s forget about its claims and look at the facts. Take the same example that FT used–the Guangzhou-Wuhan HSR, one can see that the arguments based on this case are misleading. Various riding experience and MOR statistics show that the ridership is definitely over 50%. For some non-rush hour trains, it could be half empty, but check out the trains every five minutes at the rush hour, you’d be surprised by its popularity. Heck this HSR even forced the airline companies to cancel most regional flights along the line.

    Statistics indeed confirm that the Guangzhou-Wuhan HSR is not running at its full capacity. But it is designed to be so, because Guangzhou-Wuhan HSR is part of the Guangzhou-Beijing HSR, while the Wuhan-Beijing section is still under construction. If Guangzhou-Wuhan HSR is already jammed with passengers, that only indicates poor designing and would be a much bigger failure for a brand new infrastructure project. One needs to keep in mind that the first phase of the national HSR network is not going to be ready until 2012, what we’re talking about now is only the segments(including Guangzhou-Wuhan HSR, Shanghai-Hangzhou HSR etc) of the network. When the network is ready, you would expect a huge increase in passenger ridership. You cannot talk about return/yield by just using statistics in the opening phase.

  7. Bobhugh says:

    Question: did the US interstate freeway system investment make sense?

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