Indebted ministry eyes new funding

PUBLISHED : Thursday, 29 September, 2011, 12:00am
UPDATED : Thursday, 29 September, 2011, 12:00am

The heavy debts of the mainland's Ministry of Railways are pushing the ministry to encourage more private investment in rail projects while hampering its ability to raise funds from public debt markets.

The ministry's difficulties were compounded by a Wenzhou train crash in July that killed 40 people and a Shanghai subway accident on Tuesday that injured more than 280. The Shanghai crash sent the stock of CSR, which makes subway trains, tumbling.

The ministry announced on Tuesday that joint-venture companies had the option to manage small and medium-sized rail projects, which it need not manage. It said the plan was part of its effort to 'change the direction of the development of the nation's railways'.

The plan to give more leeway to private companies was part of a set of guidelines to improve railway safety and quality and to prevent corruption in projects. It was announced on the day of the Shanghai subway accident. However, metro subways are the responsibility of municipal governments, not the Railways Ministry.

Prior to the dismissal of railways minister Liu Zhijun in February, private firms were discouraged from investing in mainland rail projects. The ministry exercised control over projects, demanding a controlling stake in them, said Zheng Tianxiang, a transport professor at Sun Yat-sen University in Guangzhou.

'What is happening now is the Railways Ministry may be going through reform,' JP Morgan analyst Karen Li said. 'After the high-speed-train accident in July, the call for reform is getting stronger.'

The ministry had postponed its plan to sell 20 billion yuan (HK$24.39 billion) of bonds until the middle of next month, Bloomberg reported.

'The reason the ministry failed to issue bonds is banks and insurance companies have less liquidity to buy the bonds,' Li said. 'The banks and insurance companies don't have much surplus cash right now.'

Banks and insurance firms are the main buyers of the ministry's bonds. The central government had been raising bank reserve requirement ratios, which had tightened liquidity, Li explained.

'The market doesn't welcome the Railways Ministry's bonds, because its debt level is too large,' said Stanley Yan, a MasterLink Securities analyst. 'The high-speed-train accident in July had a very big impact on the Railways Ministry's financing ability. Only if interest rates are high can the market accept [its] bonds.'

The ministry's total debt rose to 1.9 trillion yuan at the end of last year from 868 billion yuan at the end of 2008, while its gearing ratio rose to 57.4 per cent at the end of last year from 46.8 per cent at the end of 2008, according to ministry documents.

Yesterday, a day after the Shanghai accident, the Hong Kong share price of CSR fell 4.9 per cent to HK$3.08, while the Hong Kong share prices of the China Railway Group and China Railway Construction Corporation (CRCC), which makes subway tracks, rose.

The Shanghai crash would have a negative impact on mainland-listed rail companies, but it would not be as severe as the effect brought by the Wenzhou accident, Yan said. Subway trains accounted for less than 7 per cent of CSR's revenue in the first half of the year, he said. Subway systems accounted for less than 10 per cent of the turnovers at China Railway and CRCC, said another analyst who declined to be named.

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