Heavily indebted China Railway Corp expected to raise freight rates

China Railway's battle to reduce its debt pile through higher charges may further undermine the competitiveness of rail against road freight

PUBLISHED : Friday, 10 January, 2014, 11:35am
UPDATED : Saturday, 11 January, 2014, 5:00am

China Railway Corporation (CRC) is expected to raise freight rates early this year to relieve its massive debt burden and speed up market-oriented reform in the industry, which it monopolises.

However, such a move may further reduce the competitiveness of rail against road freight, which has rapidly overtaken it in market share.

The rail freight rate in China may rise from 0.12 yuan (15.2 HK cents) per tonne per kilometre to an average of 0.15 yuan, which the railway operator said would be “more reasonable”.

“Freight services are a major source of income for the railway operator. However, the freight rate has long been under the market value,” said Li Hongchang, a railway expert and economics professor at Beijing Jiaotong University.

CRC was spun off from the former ministry of railways in March last year, taking over the entire assets and debts of the dissolved railway department. A reform in the railway freight sector has since been at the top of its agenda.

Statistics from the National Audit Office show that the new national railway operator was bogged down in debt of 2.9 trillion yuan in June last year, while its total assets were valued at 4.66 trillion yuan.

“The primary goal for the company is to increase revenues and cut costs. To raise the freight rate is a natural solution,” Li said.

A rise in freight rates would also be an important measure to make the highly monopolised industry more lucrative for potential private investors, analysts say.

Meanwhile, a dynamic pricing system would be introduced to freight and passenger services to better reflect market changes and cash in on peak demand, state media reported recently.

China’s rail transport volume is the largest in the world, accounting for 25 per cent of the global total.

As the rail network expanded, the country’s annual rail freight volume increased from 2.04 billion tonnes to 3.9 billion tonnes between 2002 and 2012.

The average freight rate rose from 0.08 yuan to 0.12 yuan per tonne per kilometre during the decade.

The primary goal for the company is to increase revenues and cut costs. To raise the freight rate is a natural solution
Li Hongchang, Beijing Jiaotong University

Li initiated a commercial feasibility study on freight rate reform along with World Bank researchers last year.

The research shows CRC would be able to pay off its debts within seven to 10 years assuming the freight rate rose to 0.13 yuan per tonne per kilometre and annual growth in railway freight and passenger volume remained at 5-8 per cent.

The State Council issued a circular in August saying the railway freight rate would be decided in future by the market instead of the government. The National Development and Reform Commission would take the lead in the reform of the freight rate, making it adjustable in line with highway freight rates and guiding it to a more reasonable level step by step.

However, the room to raise the freight rate might be limited.

Over the past three decades, railway freight on the mainland has lost a hefty chunk of its market share to road transport.

The railway network’s share of the country’s freight volume shrank dramatically from about 48 per cent to 17 per cent between 1980 and 2012, CRC general manager Sheng Guangzu said earlier. By contrast, the market share of road freight jumped from 6.4 per cent to 35 per cent.

One reason is the overtaking of “dark goods” by “white goods”. Dark goods, a term used in the railway industry to describe coal and other raw materials, are the principal type of railway cargo.

While the volume of dark goods has remained steady in recent years, that of “white goods”, which are those other than raw materials, has been growing rapidly, and they are mostly transported by road.

The country’s rail freight services have been notorious for their complicated application procedures, long waiting times and being a breeding ground for corruption.

A recent high-profile court case involved Ding Shumiao, a Shanxi businesswoman who was accused of giving more than 49 million yuan in bribes to former minister of railways Liu Zhijun between 2008 and 2010, partly to obtain railway freight quotas for her company. Her trial ended in September, and the verdict is expected soon.

Liu received a suspended death sentence in July for abuse of power and accepting tens of millions of yuan in bribes.

... we are now using highways more, when our customers place urgent orders or we need to ship goods to somewhere trains cannot reach
Hao Zigang, Henan Ancai Hi-tech

Hao Zigang, a logistics manager with glass maker Henan Ancai Hi-tech, said rail used to be the firm’s top option for shipments in the 1980s and 1990s, but no longer.

“Trains are cheap and safe, especially for long-distance shipments,” said Hao. “But we are now using highways more, when our customers place urgent orders or we need to ship goods to somewhere trains cannot reach.”

How estimates that the cost to transport one tonne of goods from the factory in Anyang, Henan province, to Urumqi in Xinjiang by train is about 500 yuan, compared with 700 yuan by highway.

Despite the price gap, it would take as long as 10 days to ship the goods by train, considering the application procedures and unpredictable transfer time. Yet sending them by road would take only three to five days, he said.

“Nowadays, many of our customers tend to place orders more frequently than before and want their goods in a much shorter period. This prompted us to choose trucks rather than trains,” Hao said.

To recover market share, CRC announced a series of measures in June to boost efficiency and improve customer service. They include arranging cargo delivery through a telephone hotline and online platforms and offering door-to-door service instead of requiring customers to pick up their goods at train stations.

Railway expert Zhao Jian, a professor at Beijing Jiaotong University, said the expected freight rise would weaken the competitiveness of rail against road freight.

“China has raised the railway freight rate several times over the past decade, although the increases were mostly minor,” Zhao said.

“Compared with road freight, railways have already lost their price advantage for distances less than 1,000 kilometres. I really don’t think railways have much room to raise the rate.”