Mainland may hit brakes on rail network
Toh Han Shih
The mainland's ambition to build a rail network rivalling the United States' could run out of steam as Beijing tightens lending to cash-hungry infrastructure projects.
There are now concerns that, having built enough rail lines last year to stretch from Beijing to Moscow, it will have to scale back the mammoth building effort.
Weng Zhensong, a professor at the Economic and Planning Research Institute of the Ministry of Railways, warned that some railway projects were having financing problems as funds become scarcer.
'There are some projects whose economic prospects are low,' Weng said. 'Rail lines to western China will find it hard to get bank loans.'
Despite being the centrepiece of Beijing's four trillion yuan (HK$4.55 trillion) stimulus package, funding for rail projects is falling victim to government efforts to put the brakes on lax lending, which has been blamed for creating asset bubbles.
Under particular pressure will be operators of high-speed rail lines. Building a fast railway, on which trains can reach speeds of 350km/h, can cost three times more than a standard line of the same length. To cover the funding shortfall, operators of high-speed trains may have to set higher ticket prices.
While some railway projects ran into financing problems last year, the situation would worsen this year with more funds needed, Weng said. That would put pressure on local government funding for lines in their regions. Work on the 30 billion yuan Shanghai-Hangzhou high-speed passenger railway was threatened with delays last year as its builders sought more capital.
Last year, spending on railway construction soared 78 per cent to 600 billion yuan. Spending will rise a further 17 per cent to 700 billion yuan this year, according to the ministry. Macquarie Research Equities says spending on railway construction will peak at 750 billion yuan in 2011 and 2012.
The scale of the new network being rolled out is impressive. A record 9,524 kilometres of railway was laid last year and 6,840 kilometres will be built this year. That would bring the national network to 90,000 kilometres by the end of this year, the ministry said. China has the world's second most extensive rail network behind the US.
'The government is tightening liquidity and this has an impact on railway funding,' said Evan Auyang, a former infrastructure consultant at McKinsey and currently deputy managing director of Kowloon Motor Bus. Beijing this month increased the amount of cash banks must keep in reserve to curb massive lending, which reached a record 9.6 trillion yuan last year.
Debt financing of rail projects is capped at two-thirds of their cost; equity investment must make up the rest. 'It isn't a surprise there is a funding problem, because the budget is so huge, arising from a much accelerated construction programme,' Auyang said. 'The combination of limited government funds and limited debt financing ability may explain the problem.'
With Beijing tightening lending, banks are getting more selective about the projects they lend to. Ironically, the lending spree was sparked by Beijing's stimulus package, launched in late 2008 to combat the financial crisis. The rail network was the focus, accounting for most of the 1.5 trillion yuan earmarked for infrastructure.
'The stimulus package is far from adequate for China's railway projects and there is a limit to how much debt funding these projects can carry,' said Auyang.
According to Macquarie, 33,000 kilometres of lines are under construction, requiring a total investment of 2.1 trillion yuan.
The ministry needs to allocate more funding to railway projects, That could take the form of debt, bond issuance and government and private investment, Auyang said.
Geoffrey Cheng, director of Asian equity research at Daiwa Securities, said financing of high-speed rail services was becoming a problem. Fast trains began running in August 2008 on the Beijing-Tianjin line.
'The government wants people to switch to high-speed trains, but there are lots of complaints that these trains are expensive,' Cheng said. 'Migrant workers still have to use the crowded, normal trains because that is all they can afford.'
Weng said there were problems with pricing high-speed rail services. 'If the price is too high, nobody will take them. If the price is too low, there will be financing difficulties,' he said.
A second-class ticket for the new express service from Wuhan to Guangzhou costs 490 yuan.
Enough rail lines to run from Beijing to Moscow were built last year
Mainland spending on railway construction jumped 78 per cent in 2009 to, in yuan: 600b