Rail & Infrastructure

Resuming service

Is it time to think about investing in China’s railways again?

Too many tracking errors?

After a disastrous summer, the Railway Ministry is working hard to restore public confidence in its trains.

The most recent investigation into July’s Wenzhou train crash was released this week and blamed the accident, which killed 40 people, on “poor management”, reports the Shanghai Daily. This revises the conclusions of an earlier investigation that found fault with the signalling system.

In another major announcement, 54 bullet trains used on the flagship Beijing to Shanghai route but removed from service after the crash, are expected to start operating again by early December.

“After a three-month process of modifications and repeated tests, previously reported problems with the CRH380BL trains have all been fixed,” an unnamed official assured Xinhua.

The message is simple: Chinese-made trains were not responsible for the Wenzhou crash. And even if there were any problems, they’ve been ironed out by the recent maintenance programme.

The aim is to reassure passengers ­­–­ but will it work for investors too?

Certainly the sector could do with some extra funding. The cash-strapped Ministry of Railways has Rmb2 trillion worth of debt and recently suspended 10,000km of railway projects (see WiC127).

The stocks of most of the companies involved in making and running the network – such as China Railway Construction and China South Locomotive – have also been hit hard by the safety scandals (see WiC119).

But could this be a blip in what could still turn out to be the great railway boom of the century?

Between 2011 and 2015 an astounding 30,000km of new track is expected to be completed, which suggests that there must be a few investment opportunities in the sector.

Finding the right targets is a problem. Train makers probably have greater potential than companies laying down the track, according to HSBC research, since “demand for rolling stock lags the completion of railway lines”.

HSBC expects spending on rolling stock to reach Rmb680 billion ($107 billion) during the 12th Five-Year Plan, compared to about Rmb350 billion spent over the previous five years.

Away from the stock market, investors in Wenzhou are being offered a groundbreaking opportunity – to invest in a new subway. This is a first for China.

Construction started earlier this month and the project will require more than Rmb15 billion of capital. What makes the investment stand out is that the company building the railway is planning to raise Rmb3.5 billion of private capital to part finance the project.

Investors are being offered “returns on investment significantly higher than bank interest rates”, reports the 21CN Business Herald, with yields of at least 6% on offer. Individual investors will be expected to chip in at least Rmb10,000, while institutions will need to invest a minimum of Rmb20 million.

The offer has attracted more than its share of scepticism. After all, it is the norm for urban mass transit projects to depend on government subsidies.

Warier investors are wondering how the new Wenzhou system will prove to be an exception to this rule. But the plan is to copy an exception: Hong Kong’s MTR, a profitable subway operator which makes most of its money selling real estate around its stations.

The challenge is in convincing investors that Wenzhou bears comparison with Hong Kong, says 21CN, especially as Wenzhou’s own property market looks like it is heading for a fall.

And even an anonymous source from the company responsible for the project seemed to lack a little enthusiasm. “People who want to invest must first of all love their hometown. If the project is looked at from the point of view of profits, it is not worthwhile,” he advised.


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