Wednesday 23 December 2009

Is China going off the rails?

The New York Times have an interesting article on China's break neck rail growth. I have an interest in this article as I recently took the 30 minute Beijing - Tianjin train. It was great. Very fast, relatively cheap (this is a moot point) and similar in comfort to a first class air flight. I should add that the train was full when I travelled - see point in the article below.

Pettis is very good. He is also correct about China's level of infrastructure relative to its level of development. He should not underestimate the power of a trophy however.

A five hour train journey from Beijing to Shanghai would also be fantastic. Such links will improve growth and oddly allow more divergence of economic growth instead of the current clustering in the coastal and big city areas.

When you compare train investment with road investment it does make sense. Sure, this is costly and a potentially inefficient use of stimulus funds. It one reads about the growth of railways in the US over a century ago you will see the same story unfolding. The railways opened up the US and lead to huge growth. What happened to the railways companies - they all went bust and shareholders lost everything. This cannot happen in China. So what will happen?

Is China's Economy Speeding Off the Rails? [New York Times]

BEIJING — Train C2019 covers the 120 kilometers between Beijing and Tianjin in 30 minutes, passing peasants in fields burning corn stalks and warrens of shacks occupied by people who are not sharing in China’s economic boom.

The line is part of China’s 2 trillion renminbi, or $292.9 billion, investment in a nationwide high-speed passenger-rail network that may be too much train, too fast.

The time savings that the new system delivers may not justify the cost, creating a potential drag on long-term growth, said Michael Pettis, former head of emerging markets at Bear Stearns. The losers are Chinese consumers, who will have to wait for new health care and old-age benefits while the government focuses on public works spending, he said.

While the expanded service will be a “trophy” for China, the country “already has probably the best infrastructure in the world for its level of development,” said Mr. Pettis, now a finance professor at Peking University.

China accelerated its high-speed-rail development plan last year in the wake of the global financial crisis, saying it would increase the passenger network by a third to 16,000 kilometers, or about 10,000 miles, by 2020.

Bombardier, the Montreal-based company that is the world’s largest maker of passenger locomotives, and Munich-based Siemens are helping to build the system. Bombardier’s Chinese joint venture won a $4 billion contract in September to build 80 high-speed trains. Siemens, the largest European engineering company, and Chinese partners received a €750 million, or $1.08 billion, order in March for 100 trains.

The centerpiece of the service is a 1,318-kilometer line with 16 kilometers of tunnels that will cut the trip between Beijing and Shanghai to five hours from 10.

Set to open by 2012, the 221 billion renminbi project currently employs 127,000 workers and is the most expensive engineering program in Chinese history, eclipsing the Yangtze River’s Three Gorges Dam, the world’s biggest hydroelectric project, which cost 203.9 billion renminbi.

Spending on railroads is growing faster than on any other area of investment, rising 80.7 percent to 464.6 billion renminbi in the first 11 months of the year from the same period in 2008, according to China’s National Bureau of Statistics.

Investment in fixed assets like factories and the rail network accounted for more than 95 percent of China’s 7.7 percent growth in the first three quarters of 2009 and made up 45 percent of gross domestic product, which is higher than any major economy in history, according to Stephen Roach, chairman of Morgan Stanley Asia.

Without a surge in consumer spending and with export growth stalled, investment must rise even further to stoke growth, he said in a Dec. 18 speech in Beijing.

“These are ridiculous, unsustainable numbers for any economy,” Mr. Roach said.

China may be hit with a slowdown next year as the impact of the investment-led expansion wears off and shipments to the United States, the traditional external source of growth, fail to pick up, Mr. Roach said in an October report. He did not specify how much he thought growth might slow.

Some economists say the high-speed network is symbolic of a stimulus program that places too much emphasis on infrastructure spending and not enough on raising living standards. The average urban Chinese worker made 28,898 renminbi last year, a tenth of the $39,653 average wage in the United States, according data from the U.S. and Chinese governments.

Most Chinese rail travelers will not pay the premium to ride on the fast trains, Zhao Jian, a professor of economics at Beijing Jiaotong University, said in a September interview on Chinese television.

A second-class one-way ticket for the half-hour Beijing-Tianjin trip costs 58 renminbi, about three-quarters of the workers’ average daily pay. A so-called hard-seat ticket on a slower train, which covers the distance in two hours, sells for 11 renminbi.

Passenger reluctance means revenue from the high-speed lines will not be enough to service the debt if railway expansion continues at its current pace, Mr. Zhao said in the TV interview. The Ministry of Railways has 383 billion renminbi in bonds outstanding.

“If America had its subprime crisis, in China we have a railroad-debt crisis, or you could call it a government-debt crisis,” Mr. Zhao said in the TV interview.

The Chinese Railway Ministry says that the new system makes economic sense: A two-track bullet train can transport 160 million people a year, compared with 80 million for a four-lane highway, it said in a Dec. 21 faxed statement.

“The safest, fastest, most economical, most environmentally friendly, most reliable mode of transport is high-speed rail,” the ministry said.

The fast trains leave from Beijing South railway station, a new glass and steel structure that looks like a flying saucer. The slower trains depart from the half-century-old Beijing Station, where the clock tower marks the hour by playing “The East is Red,” a tribute to Mao Zedong that was popular during the Cultural Revolution.

Sitting on the stiff green benches in car 13 of train 4401, Yuan Hong, 40, says she does not mind that the old line takes an extra 90 minutes.

“It’s a huge price difference,” says Ms. Yuan, who works as a cleaner in Tianjin. “This is the train the common people take.”


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