Not fare

They’re fast, but can provincial governments afford them?

WiC must be in a train-spotting mood this week. Here is another China railway statistic, this time about the ‘Harmony Express’ high-speed train that runs between Wuhan and Guangzhou.

The bullet train covers a distance similar to travelling from London to Edinburgh and back, but in roughly the same time it takes to watch Braveheart (i.e. 180 minutes). Try the actual return trip in the UK, and allow for closer to 9 hours. More than enough time to spend with Mel Gibson…

In a matter of just a few years – and from scratch – China has become the world’s biggest operator of high speed trains. Conventional trains aren’t being ignored either. Most of the 42,000km of extra track to be laid in the coming decade will carry trains of the slower variety.

All of that comes at a cost. According to its 2010 plan, the Ministry of Railways will spend Rmb823.5 billion this year – Rmb700 billion for construction and the remainder on trains and equipment.

But as China Economic Times reports, this leaves questions of how this is going to be financed. And like many of China’s current crop of awkward questions, the trail once again leads to local governments.

Since 2004, 31 provincial governments have signed agreements with the Railways Ministry to create ‘joint-venture rail companies’. These co-own and co-finance the track going into their provinces. Railway bureaucrats say there are 145 JV companies, spanning practically every province.

The funding scheme was the neat idea of the central government in Beijing, which wanted to alleviate some of the costs of financing its railway ambitions. Under the structure, the local governments are charged with finding about half the required funds.

The strain is starting to show. China Economic Times reports that local government representatives spoke openly for the first time of their financing difficulties at a recent seminar. For example, Zhejiang province’s vice president for rail investment, Chen Jiang, revealed that financing had become an “unprecedentedly heavy task” and that his province was exploring ways “to alleviate pressure on railway investment.” Chen noted that Zhejiang’s 24 rail projects would eventually require Rmb50 billion, and by August about Rmb11.82 billion had been raised.

Hebei faces a shortfall too. Its current projects require Rmb28.3 billion to complete and it still needs to find Rmb13.3 billion. It is already facing challenges matching cashflows from train projects with the huge interest payments owed to banks for the loans.

By 2012, the central Ministry of Railways estimates that it will have incurred Rmb2.5 trillion in liabilities. No one knows the precise amount the 31 provinces will have run up; nor how many of the lines will prove to be white elephants, with passenger volumes insufficient for servicing bank debt. But as the China Economic Times states, the local officials it met at the railway seminar expressed a fear that many of the 145 JV rail companies could “collapse” under the weight of their debt.

It’s a view that Zhao Jian, a professor at Beijing Jiaotong University, shares. “A real debt crisis is building up for the government and it is going to break at some point,” he told the Financial Times of the rail investments.

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