It became known as “Railway Mania”, a period in the UK during the 1840s, when irrational exuberance created one of history’s most notorious stock market bubbles. The country was a laying down the world’s first inter-city rail network, and the new middle class – made rich by the industrial revolution – was more than happy to fund it. Fortunes were made as speculators pushed up the price of railway shares, and many were lost when the bottom predictably fell out of the market.
Could China’s army of impulsive retail investors be about to repeat the mistakes of the past? Or are they on track to make a fortune?
We’re about to find out. A train company is planning to to raise between Rmb30 billion and Rmb50 billion ($4.4 billion and $7.3 billion) in an IPO later this year, a source in the Ministry of Railways told the China Daily last week.
The Beijing-Shanghai High-Speed Railway will be a massive improvement on the pre-existing line: it will cut what is usually an overnight journey into a much briefer four-hour trip. The 1,300 kilometre route between between the two economic hubs is easily China’s most important transportation link. And when it becomes operational in 2012, it will give travellers an alternative to flying.
The project is expected to cost Rmb220 billion, and so far around Rmb122 billion has been invested. This kind of project is normally financed from national funds and via bonds issued by the Ministry of Railways. But if the IPO goes ahead it shows that the government is willing to consider alternative methods to fund its rapidly expanding railway network, and it could be used in other lines that are under construction.
Many of the ingredients that made Railway Mania such a dangerous concoction in the past are present in China. Like many of the railway lines that attracted investment money during the 1840s, the Beijing-Shanghai line has yet to be completed, which is obviously more risky than investing in an operational project. Also, Chinese retail investors are not unlike the speculators in the UK all those years ago, in that they are an up-and-coming newly monied class. The behaviour of these investors between 2005 and 2008 created one of the world’s most volatile stock markets.
Pundits are recommending rail to investors too: “The railway industry has strong and sustainable growth potential and we expect it to experience a high growth period over the next three years,” Lin Sheng, an analyst at Essence Securities told the China Daily.
Strategic investors interested in taking a large chunk of the project will not be left out, since China Railway Investment Company, the majority shareholder of the company building the line, intends to sell a single investor a 4.5% stake for Rmb6 billion.
But not any old investor can participate in China’s showcase infrastructure project. Interested parties will have to show at least 10 years operating experience and net assets worth no less than Rmb20 billion. It is likely that the chosen investor will be a major state-owned company. Large banks, such as ICBC and China Construction Bank, are possible contenders. But overseas funds have also visited the railway line.
“Eligible investors should be those of a large scale that do not require a short period for a return on investment,” an analyst told China Business News.
The analyst added that the project will require a huge up-front investment, and it will be years until the investor is rewarded. That’s a message China’s retail investors should perhaps take on board.
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