A well trained country

It was almost exactly 10 years ago – on February 6 2009 – that WiC published its first Talking Point in our first issue. The focus was trains and what we described as the dawn of a revolution in high-speed rail.

In that article we made our first prediction: that 2009 would be the year of the train. That turned out to be accurate and as we look back over the past decade it seems a good moment to assess how bullet trains have transformed China – and, if anything, exceeded the public’s expectations.

How big is the high-speed network that China has built?

When our article was first published the only operational line was a connection between Beijing and Tianjin – a track that shortened the travel time between the two municipalities from two hours to 30 minutes.

Since then 29,000 kilometres of bullet train track has been laid across the country with the latest feat the opening last year of an underground section connecting Hong Kong to the high-speed network.

To put that decade’s worth of construction into perspective: the new lines in China have more than doubled the total high-speed track worldwide. The prior bullet lines – in countries like Japan and France – were built over a timespan roughly five times longer.

Nor are the Chinese finished with construction. By 2025 the plan is to have 38,000 kilometres of high-speed track (out of a total rail network of 175,000km). By then the bullet network will cover over 80% of China’s 300-odd cities.

Are bullet trains popular with passengers?

In early 2009 around 70,000 Chinese travelled every day on the sole bullet train line. The next major milestone came in 2011 when annual passenger usage crossed 1 billion; by 2014 over 3 billion had used high-speed rail.

Three years later the passenger numbers had ballooned to 7 billion trips, with the railways reporting 35% annual growth in usage. By the end of last year total cumulative passenger journeys reached 10 billion.

In 2008 the proportion of rail journeys taken in China at speeds of over 300km/h was just 8.7%. Today that percentage has risen to 52.3%, meaning that more than half the rail journeys in China are on bullet trains. The record for the most people to travel on a single day on these Chinese high-speed trains is 7.6 million – i.e. more than the population of Scotland.

Of course, the train network is always in the news at this time of year as hundreds of millions migrate back to their hometowns to celebrate China’s Lunar New Year with their extended families (the Year of the Pig began on Tuesday).

To cope with the surge in demand, about 5,700 high-speed trains will run daily over the week-long holiday period.

What about the wider impact?

The figures point to the scale of the rail infrastructure put in place – an achievement that even critics of the Chinese government must concede is unparalleled.

Investment in rail was overdue. As we pointed out in our original Talking Point, spending on railways had lagged China’s phenomenal economic growth. In the 28 years between 1980 and 2007, China added new track at a rate of 1.67% a year versus average GDP growth of 9.8%. And in 2009 it had just 81.2km of railway track per square kilometre of its territory, or roughly a tenth of the ratio in countries like Germany.

So the benefits of expanding the network looked hard to dispute. The addition of faster, more technologically advanced trains brought broader advantages – with the impact measurable from the early stages of their operations. For example, the first line connecting the Chinese capital with Tianjin had a palpable impact from day one as tourists flooded into the city from more affluent Beijing (visitors grew fivefold). The boom spread across Tianjin: just over 100 days after the line was opened, a survey revealed that the 48 biggest commercial enterprises there had seen sales rise 35% over the same period the previous year.

The addition of high-speed lines went on to boost domestic tourism wherever the track got laid. And because speeds of up to 350km/h have truncated travel times, economic development has spread along the routes – moving capital and investment from richer provinces to poorer inland ones.

A good example is the Guangdong-Guangxi-Guizhou High-Speed Rail Economic Belt. Official data shows that 160 projects have been started along that line in the last three years, with total investment of Rmb250 billion ($37 billion) spreading wealth from coastal powerhouse Guangdong to mountainous Guizhou (historically China’s poorest province).

The combined GDP of the 13 cities along this line hovered around Rmb4 trillion in 2014. By 2017 that had risen to Rmb5.16 trillion, equating to year-on-year increases of 29%, far outstripping average GDP growth during that period. (For a first-hand description of the rail-led developments we witnessed in Guizhou see WiC386.)

There has been a cluster effect in other parts of the country – particularly where third-tier cities are within an hour’s bullet train journey from major conurbations. In these cases, the railway joins up nearby economies, adding to GDP growth (and increases in property prices) in the lower-tier cities in question.

An instance is the fairly recent opening of a high-speed link between the coastal city of Qingdao in Shandong and inland Weifang. The two used to be two and a half hours apart by road, but the high-speed train covers the same distance in 45 minutes. Weifang has a population of 9 million – of which 2.7 million are urban residents – and for most non-Chinese is relatively unknown (a few Brits may know it as the resting place of Eric Liddell – the Scottish sprinter made famous by Chariots of Fire). But thanks to the compressed journey time, Weifang enjoys the benefits of being a ‘satellite economy’ of Qingdao, with businesspeople commuting easily between the two.

It has also become a lot easier to get between provincial capitals, which has created new ‘corridors’ for commerce. For example, state broadcaster CCTV calculates that the average journey time between Guangzhou and Wuhan has shrunk from 14 hours (pre-bullet) to four hours; and from Taiyuan to Xi’an from 10 hours to three hours.

Clearing the air…

China has some of the most overcrowded airspace in the world and some of the most delayed flights (according to QDaily, 29 of the 30 worst airports for flight delays are in mainland China). A large part of the reason for this is military – the airforce steers passenger jets into narrow corridors and hogs most of the space for itself on national security grounds. Additionally bad weather can cause chaos. A couple of summers ago thunderstorms led to 9,392 flights being delayed.

The likelihood of long waits in departure lounges has added to the allure of travel by high-speed train, particularly on inter-city journeys of five hours or less. The trains are punctual and the stations are often closer to city centres than airports. The security is less onerous, the trains more frequent and you can show up closer to departure times. The seats are larger and people also like the benefit of continuing access to the internet on their journeys.

Benefits like these explain the popularity of the Beijing to Shanghai route. It carries around 493,000 passengers per day between the two cities and it is easy to see why it has become the preferred option over flying. It takes just four hours: a much shorter trip when you factor in the journey times to both airports (an hour away from the respective CBDs), plus the high likelihood of delays. Moreover it also costs half as much to travel between the pair by train.

China Business Journal points out that some air routes no longer exist or have had their frequencies drastically reduced because passengers prefer the bullet train alternative. Examples include Chengdu-Chongqing, Beijing-Taiyuan and Hefei-Fuzhou.

Carriers such as Air China and China Southern may quibble with this point, but there are bigger benefits in fewer flights. High-speed rail has given passengers more cost-effective and reliable alternatives to delay-ridden air travel; and fewer flights has taken some of the pressure off China’s already crowded airspace. Plus there is an environmental benefit: from both a fuel and pollution point of view it is more efficient to take the train than fly (especially as China’s bullet trains are routinely very full).

Are the railways profitable?

Not surprisingly, the crown jewel in the network is the Beijing-Shanghai line. Its profitability has improved dramatically although it made losses in its first two years of operations; Rmb1.29 billion in 2013 and then Rmb2.2 billion the following year.

However, it moved strongly into the black in 2015, making Rmb6.58 billion that year and Rmb9.52 billion the next; 2017 is the most recent for available data and it showed Rmb12.71 billion of profit on Rmb29.6 billion of revenues.

National Business Daily reckons that five other lines are profitable, each linking some of the richest coastal cities. It lists these as: Beijing-Tianjin (the oldest), Guangzhou-Shenzhen, Shanghai-Hangzhou, Shanghai-Nanjing and Nanjing-Hangzhou.

Most other lines run on subsidies and local government support. This has triggered a minor debate among academics as to whether the levels of debt incurred on the 29,000km network are sustainable. Last month, for instance, Caixin published an opinion piece by Zhao Jian, director of the China Urbanisation Research Centre at Beijing Jiaotong University. He argued that while many were praising the scale of the bullet train system, “a blind eye” was being turned to the other side of the equation: that China Railway Corp was shouldering financial risks from running-up the world’s largest rail debt.

Zhao pointed out that some lines did not make economic sense, but were built more as political statements. He gave the example of the Lanzhou-Xinjiang line, which given the terrain was a costly technical feat to pull off. However, passenger demand on the route is low and Zhao’s estimate is that only four pairings of bullet trains zoom along the tracks each day – although there is capacity for 160 pairs to do so. That means that the “transportation revenue is not enough to pay for the electricity used,” he calculates. That was trumped by a political imperative to connect the ‘national’ system to the restive region of Xinjiang.

The opening of a line connecting Hong Kong had similar political motivations by meshing the former British colony closer into the Chinese mainland. While its usage levels are reasonable (80,000 passengers per day) the line’s HK$85 billion ($10.83 billion) cost dwarfs the HK$671 million it is forecast to earn in its first year.

China Railway Corp’s total passenger revenues grew last year to Rmb340 billion ($50.4 billion). That looks large if you compare it to India, a nation with a similarly vast and well-used rail network. According to the Times of India, around 8.2 billion passengers travelled by train last year – though ticket revenues amounted to just Rs500 billion, or roughly $7 billion.

However, Zhao says that China Railway Corp’s total liabilities have grown to Rmb5.28 trillion, of which more than Rmb3.3 trillion (he estimates) was incurred building the high-speed rail system.

What does this all mean in financial terms? That the debt is going to be difficult to pay off. Zhao’s calculation is that the 4.75% loan interest demanded on the debt exceeds the ticketing revenue of the entire high-speed network.

Other controversies?

Of course, the broader social and economic benefits of the high-speed trains are harder to quantify. Economists can generally make a wider case for almost any mega-project over the longer term, with multiplier effects, productivity boosts and trickledown impact. But it is not only the railway’s rate of return that has sparked controversy over the years.

In 2011 a fatal crash near Wenzhou resulted in 39 deaths and drew accusations that the authorities were trying to cover up the cause of the crash because of corruption (see WiC117). Speeds were temporarily curtailed to soothe nervous passengers. (In fact, the accident proved an aberration: the system has proven remarkably safe ever since.)

Corruption was a hot-button issue again when one of the main men behind the high-speed revolution was jailed for graft. In mid-2013 former railways minister Liu Zhijun was given a suspended death sentence for abuse of power and graft (the speculation was kickbacks worth up to Rmb1 billion – allowing Liu to keep 18 mistresses and buy 374 apartments and 16 cars; see WiC202).

Liu’s downfall confirmed what many suspected: when you spend trillions of yuan on such a massive undertaking, some of the cash is bound to flow into unauthorised areas.

That lesson aside, Liu’s jailing perhaps had its roots in factional politics. It was no coincidence that the ministry of railways was dissolved at the same time – fracturing Liu’s fiefdom (and its patronage system) as part of President Xi Jinping’s drive to consolidate his own power over the Party.

Another source of controversy were the trains themselves. The original rolling stock owed much to technologies pioneered in Europe and Japan, but over time local manufacturer CRRC (the state trainmaking monopoly) managed to reverse-engineer a lot of the know-how from its foreign partners. When the Chinese then began to sell their own high-speed services to overseas markets, this drew howls of protest from the likes of Japan’s Kawasaki (see WiC114).

However, the most recent generation of bullet trains – the so-called Fuxing series (meaning ‘Rejuvenation’) – has clearly benefited from the mass buildout of the Chinese network. Southern Weekend has pointed out that through indigenous innovation, the Rejuvenation category locomotives are vastly superior to the earlier Harmony class trains. It listed several key improvements: average operational life has been extended from 20 to 30 years; a more streamlined shape has reduced resistance levels and improved energy efficiency by 17% when the train is travelling at its average speed of 350km/h (its top speed is 400km/h); and the new carriages are bigger and more comfortable (there’s even less ear pain for passengers when the trains race through tunnels). Importantly, the Rejuvenation trains are even safer too, each with 2,500 diagnostic monitors (about 500 more than fitted to the earlier Harmony variant).

Wang Yueming, chief researcher at China’s Academy of Railway Sciences told Southern Weekend at the time of the new model’s launch that China had engineered its own high-speed train by taking four types of foreign technology and learning from their respective strengths and weaknesses. “We’re now at the stage where we have full autonomy and our R&D is clear of foreign technology platforms,” he said. Xinhua reached the same conclusion describing the Rejuvenation train as an “outstanding example of one who starts late, but develops fast”.

What next?

Almost all of CRRC’s business is domestically focused, although the train maker has announced high-speed rail projects in a number of partner countries, mostly under the auspices of the Belt and Road Initiative. Some of the early deals have been slow to get going, often running into political problems. But other manufacturers clearly see the threat, including European rivals Siemens and Alstom, which want to merge their train divisions in a bid to bulk up against the Chinese (the EU’s antitrust body blocked the proposal on Wednesday, however, saying it would create too much of a monopoly and claiming that there is little indication that CRRC is going to become a force in Europe in the foreseeable future).

Back in China, the network still has more than a decade’s worth of expansion planned. The operator, China Railway Corp, has a map that shows the backbone of the system – eight lines running horizontally across the country and eight lines running vertically north-to-south – with the total high-speed coverage envisaged for 2030. Intriguingly the map includes a tunnel to the island of Taiwan, suggesting the planners are expecting some kind of ‘reunification’ in the next 10 years.

In that same timeframe some of the lines are likely to become accessible to stock market investors too. An IPO in Shanghai of the profitable Beijing-Shanghai line would help pay down some of the network’s debt and add another blue-chip counter to the bourse, for instance. But when this might happen is unclear: discussions about this IPO have been going on for several years.

A metaphor for modern China?

Practically every seat that gets booked on high-speed trains is paid for on websites and smartphone apps. Tickets are picked up from machines at the station that scan passenger ID cards and print out boarding passes. At security points, these are then matched with the traveller’s identity using high-tech facial recognition.

This use of technology makes the process of boarding a high-speed train remarkably straightforward for local passengers. Given the numbers of passengers on the move, the stations would be chaotic without the technology to speed things up.

Of course, the system was designed with citizens of mainland China in mind and it is notably much harder for foreigners to navigate. To buy a ticket, a non-national must bring their passport to the station and queue at an old-fashioned window (where the waiting time is far more unpredictable). For non-Chinese speakers, finding the way around the station and getting through security can be challenging too.

Perhaps the difficulties for outsiders offer something of a metaphor for the wider context in today’s China. International executives who worked in China in the two and a half decades after ‘reform and opening’ first began enjoyed a privileged standing in a country still desperate for their skills, capital and technology.

That era has passed and international expertise is needed much less today. Multinationals even complain that the playing field is tilted against them and that the business environment favours local firms. And when their foreign executives travel on a high-speed train what strikes them is how quickly the Chinese have caught up, and even inched ahead.

A decade after we published our first views, WiC leaves you with this thought: China’s bullet train network works well for 99.9999% of its passengers – i.e. the Chinese – but for the foreigner the impediments they run up against in the system might suggest a wider truth… they’ve become increasingly superfluous.

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