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On a toll-free investment road to nowhere in China

Motorists line up in their droves to make use of a new policy but the official shift may also deter much-needed backing for infrastructure

PUBLISHED : Tuesday, 02 October, 2012, 12:00am
UPDATED : Tuesday, 02 October, 2012, 4:02am

The mainland's new toll-free policy has not only created widespread traffic jams on the country's highways over the National Day break, but will also deter investment in highways, casting further uncertainty over Beijing's aggressive road-building plan to reignite the slowing economy.

Beijing launched the nation's first toll-free period at midnight on Sunday, the start of the Mid-Autumn Festival holiday, waiving highway tolls for cars with seven or fewer seats. The levies will be lifted on 20 annual holidays, including Lunar New Year and the Ching Ming festival.

According to the State Council, the idea behind the policy is to increase road usage and cut travel costs during holidays. The Ministry of Transport estimates motorists could save as much as 30 per cent of their travel costs by driving to their destination.

"The policy will [also] alleviate transport shortages during holidays," Luo Ping, from the National Development and Reform Commission's (NDRC) Institute of Comprehensive Transportation, told Xinhua.

Whatever its virtues, the toll-free policy certainly brought more traffic. Barely three hours after it came into effect, cars began to back up on expressways throughout the Pearl River Delta, Xinhua said. The traffic jam was as long as 20 kilometres on one stretch between Shenzhen and Guangzhou and 28 kilometres between Shenzhen and Humen. The Ministry of Public Security said expressway usage was up by as much as 40 per cent on some freeways on Sunday compared to the same time last year.

China has the world's second-longest road network behind the United States and ahead of Europe, and tolls are collected on many of its roads.

Lifting those tolls for the holidays is all part of a broader shift that some analysts say will deter investment in the sector.

"The central government is gearing policy towards drivers and putting investors at a disadvantage. It will discourage road construction and has already done so," Barclays Capital analyst Patrick Xu said.

This will not help some of the biggest infrastructure builders, which are already feeling the economic pinch.

In the first half of the year, China Communications Construction saw the value of its new road contracts drop 40.3 per cent to 36.62 billion yuan (HK$44.83 billion), while China Railway Construction Corp secured 37.51 billion yuan in contracts to build new roads on the mainland, just under a third less than last year. HSBC expects the new toll policy to trim 1.9 per cent from highway revenue this year and 5.5 per cent every year thereafter, cutting the earnings of listed mainland highway operators by up to 13 per cent next year.

"Foreign investors like Macquarie will be less willing to invest in Chinese highways. Macquarie has invested in some Chinese toll roads and will be getting a lower return," Nomura analyst Jim Wong said. "Even state banks, which fund a lot of highways, will see longer payback time."

Francis Cheung, managing director of China-Hong Kong strategy at CLSA, says there is a risk that some highway projects recently approved by the NDRC will not get enough financing.

The NDRC approved 2,018 kilometres of new highways last month to help stimulate the economy, projects that some estimate could take more than 200 billion yuan to build.

"The roads have been approved by NDRC, but it is up to local governments to find funding. That is where you are going to find problems. The objective is there but the financing is not clear. The road building is going to be slower than expected," Cheung said.

That's because mainland banks are now more reluctant to fund infrastructure projects because of the heavy debts local governments took on to realise the 4 trillion yuan national stimulus programme from 2008 to 2010 mounted in response to the global financial crisis, Cheung says.

He says that banks have historically lent about 60 per cent of the cash needed for highway projects.

One CLSA report says the country has amassed as much as five trillion yuan in debt related to highways, of which about half is borne by local governments.

"If they [the local authorities] don't get enough money, they will build on a bit-by-bit basis depending on how much money they get; or quietly shelve projects," Xu said.

An equity analyst who declined to be named says Beijing is not concerned if investment in the 2,018km of new highways suffers.

"The government's job is to announce the projects. They repeat it again and again to boost market confidence and woo investors," the analyst said, pointing out that many of the projects were previously announced for the 2011-2015 five-year plan.

Even Luo concedes the toll-free policy might hurt investment in highways. But she also insists the impact will be limited, because it will apply on just 20 of 365 days each year.

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