Veteran investor James Cheng returns to our pages this week. The fund manager with Morgan Stanley Asset Management wrote an essay for WiC in issue 76, posing the question ‘Can China Innovate?’. In this follow-up piece he discusses China’s push to build the world’s longest high-speed railway network. After riding on a bullet train from Guangzhou to Wuhan, Cheng considers how high-speed rail will impact property values and economic growth – as well as the aviation industry. White elephant or smart long-term planning? Here is his answer:
Intrigued by all the news on China’s high-speed railway (HSR), I decided to test out the system myself. Like many things happening in China, there is really no precedent and little to compare to. The length and the breadth (in terms of people serviced) make it unique.
Today, China is one of 10 countries in the world with HSR. By the end of 2011, the length of its HSR will be longer than all the high-speed rail systems combined globally. By 2010, there was 91,000km of Chinese railway track, of which 4,812km comprised newly laid HSR and 3,546km upgraded track. But by the end of 2020, the entire HSR length will be about 50,000km, including 34,000km upgraded from existing lines to enable speeds of above 200km/h. Total railway length will be about 120,000km by then, but rail density will still be very low by developed country standards.
We started the morning from Hong Kong in a hired car at 8am, crossed the border into Shenzhen, visited the largest manufacturer of container boxes globally for an update and then travelled north to visit Gree and Midea, two firms whose combined share of the world’s home air conditioning market is about 50%. Our last meeting finished at about 5:45pm and we drove to the Guangzhou South Terminus to catch the 7pm train to Wuhan in central China. So we left Hong Kong at 8am and ended up in Wuhan, 1,000km away, before the day was over, having completed three factory visits along the way! In the early nineties, this trip would have taken me a good three days.!
My first impression was of a humongous train station that’s surrounded by barren land as far as the eye can see. I am told the site is a 45- minute drive to Guangzhou city centre.
That makes it hard to not to conclude that this must be a “Super White Elephant”. This sense of emptiness and vastness never left me for the entire four hour train trip (it would have been three hours if we had taken the direct service; we stopped at 10 stations on the way).
A similar scene greeted me when we arrived at the Wuhan terminus – that is, another enormous station, 40 minutes ride (without traffic) to the city centre. For the first 20 minutes of highway driving, we drove through miles and miles of empty land.
One very practical question that still bugs me – what is the economic impact on land value and development of this ambitious rail system? By making hitherto worthless land (near stations) accessible, how does it impact land value?
In post-war Japan, there were two booms that preceded the Heisei boom in the mid-eighties, the ‘Remodelling the Japanese Archipelago Boom’ and the Iwato Boom. In terms of percentage appreciation, the Iwato Boom witnessed a bigger appreciation in urban land prices. This also coincided with the 1958 approval to build the first Shinkansen line between Osaka and Tokyo. Surprisingly, empirical studies on the effect of long distance rail accessibility on real estate are relatively rare (see note 1), especially HSR, although academic research has confirmed the positive impact of urban railway construction on land premiums, especially if there are no competing forms of transport in the surrounding area.
On further thought, could it be great foresight on the part of the policy makers to go for HSR instead of conventional rail? Already, the Chinese railway system has the highest usage in the world with 6.5% of global railway track but 30% of the world’s passenger-kilometres carried and 28% of its freight tonne-kilometres. At 8% growth, passenger-kilometres travelled will increase to 1.6 trillion by 2020. It will probably be too taxing for a conventional train system to manage such an increase in volumes. Planning to meet the needs of 1.3 billion people is an unique experience, and in this case the engineers may have concluded the only solution was to move people around much faster (if you halve the journey times, the trains can make twice as many trips).
Our ride took us through three provinces (Guangdong, Hunan and Hubei) with a total population of 220 million, more than the combined populations of France, Germany and the UK. Launched in December 2009, the route now has 75 trains travelling in each direction. It’s no wonder that the Xinhua News Agency reported recently that 70% of the air-routes covering a distance of less than 600km from Wuhan have been cancelled! Over such distances (the equivalent of London to Glasgow) planes can’t compete with high speed trains.
In terms of cost, the economics seem compelling relative to air-travel. The purchase cost of an Airbus A380 plane carrying 900 all-economy passengers is about $320 million, compared to the average Chinese train cost of $20 million (for 1,000 passengers). Boeing estimates that China needs to add 4,330 aircraft at a cost of $480 billion by 2029. If China cut the number of aircraft it requires by half, the savings would help pay for the entire 16,000km of new HSR track (priced at Rmb100-150 million per kilometre). And most of the value-add is retained within China as the train and track are produced domestically.
The London-Munich rail trip via Paris covers the same distance as the Guangzhou-Wuhan trip, but it takes more than 11 hours. Many have argued that for a country with per capita GDP one tenth that of Europe, the value of time is too low to justify such speed.
But if you can build a system at less than half the price and three times faster, why not? Furthermore, more people will soon be able to afford high-speed rail (the economy’s size will increase by another 50% by 2015).
China’s population density also makes the HSR cost effective. The main area served by China’s eight major HSR lines (4 North-South and 4 East-West) has a population density that ranges from 200 to 700 persons per kilometre of track. In Europe, the average density is no more than 10-49/km but some areas around Germany and Northern Italy have a population density of about 100-199/km. The Atlantic coast of the US has a density of 10-50/km and the West Coast is about 10/km. Japan, also with a comprehensive HSR system, has a better fit with the Chinese experience, with an average population density of 336/km. The HSR uses less open-space land than the alternative – highway construction – and the location of HSR stations can serve as a focus point for sustainable local development (see note 2).
Back to my own trip: despite the 21st century hardware, the process for ticket purchase is far more a 19th century one. You can’t book online – you actually have to go to the train ticket counters to purchase tickets. You also need identification, making it messy to get others to purchase on your behalf. And at the station, they only accept cash! You can use credit cards only at vending machines at the station, which also don’t seem to take foreign credit cards.
First class hardware, third class software – frustrates you no end!
Like most things in China, this is a truly unprecedented experiment and may look reckless on the surface. I have no answer on all the safety and financial viability concerns (The new minister of railways recently announced that train speeds would be slowed to 300km/h, both to improve safety and make tickets more affordable). But even if it is not financially viable, it will probably end up like the internet bubble – some people got hurt financing the internet, but it ended up spurring lots and lots of innovation. In other words, it was a ‘good’ bubble.
However, I do believe that the cost of building the system (versus equivalent options) plus the fast economic growth that it will encourage will mean that HSR becomes affordable much faster than expected, especially if you account for externalities like environmental benefits. According to the International Union of Railways, the externality cost of trains at €22.9 per 1,000 passenger-kilometres is the lowest among the four main transport modes. Car externality is highest at €76 followed by airplane at €52.5 and bus at €37.7.
Let me end with this observation – when the Guangzhou-Shenzhen Highway was completed 20 years ago, the toll charge of Rmb75 was considered exorbitant and the highway was empty. It bankrupted the company that had the vision to build it. But today, this highway is one big traffic jam near Shenzhen. Traffic is up nearly 10 times over the past seven years and the financial projections are turning out to be conservative! And nobody has done any study on what it would have cost Shenzhen-Guangzhou economically without the highway.
1. High Speed Rail Accessibility impact on Property Prices: Evidence from St. Pancras International Station in London – Francesa Pangliara, Clara Barrasso and John Preston
2. The Economic Impact of the California High Speed Rail in the Sacramento/Central Valley Area – Shawn Kantor.
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