Thursday, June 23, 2011

Looking underneath China's glittering High-Speed Rail program

Yesterday we posted the article from the New York Times about China's high-speed rail and how miraculous it was. I also mentioned that the New York Times editorial board has always loved high-speed rail.  I wonder how much that has to do with just plain old Democratic Party ideology.

The NYT article made much about how terrrific the train was and how beneficial it would be to the Chinese economy.  The downsides of the HSR program in China were also mentioned, but almost as an afterthought.

The fact is that the Chinese high-speed rail program is in very deep doo-doo.  They've overspent like crazy, trying to have the most prestigious biggest and best HSR system in the world.  It's like their 2008 self-promotional Olympics, a national show-piece for the entire world to admire.  That may be good politics; but it's obviously lousy economics.

Their HSR system has had to be slowed down due to excessive operating costs, and also due to the shoddy construction which threatens rail operation safety.  Just to show how ambitious to show off the Chinese were, they pushed their German-designed rail technology 30 and 40 mph beyond the factory recommended speeds and that raised additional major safety concerns.

We haven't mentioned that all that borrowed money incurred huge debts and also created some major corruption opportunities. (That can't possibly happen here, can it?) And, their HSR trains and train stations are near empty because even with reduced prices, their tickets cost far too much for most Chinese. 

Let me make this point here.  There is indeed wide-spread enthusiasm for high-speed rail.  However, it is grossly mis-informed.  The assumption appears to be that high-speed rail is just like any other passenger rail, only much faster.  That's not correct.  

High-speed rail has high -- very high -- ticket costs which separate the "masses from the classes."  Speed costs.  High-speed rail costs for operations, maintenance and replacement are the highest in the railroading industries.  That's as true in China as it will be in the US.  Not to understand that is to be severely misguided.

There seems to be a pattern for countries that suffer under dictatorial, autocratic, and rigid regimes.  They need to create self-justifying show-pieces, like very fancy hotels for their foreign visitors, a downtown fancy shopping mall in the Capital, or fancy airports, and, in this case, fancy railroads.

Is that why we need HSR in the United States, and in California?  We need world admiration and prestige?  Like posturing and strutting teen-agers? Grow up and get real, America and California!

Anyhow, here's an article from Reuters News about the Chinese HSR downside.

China's railway boom hurtles into the red

By Michael Martina and Xin Zhou
BEIJING | Thu Jun 23, 2011 6:05am EDT

(Reuters) - The numbers for China's relentless push for a high-speed rail network are impressive -- in terms of debt, not passengers.

The argument in support of the vast project -- with many lines connecting to more sparsely populated inland regions -- is that they are a strategic investment that will link markets across the country.

Detractors counter that while high-speed rail may suit the densely populated eastern corridor, investment is wasted on inland projects which are better served, and more cheaply, by short flights and slow trains.

"It will be a liability, not an asset, for China," complained Zhao Jian, a professor with Beijing Jiaotong University, a vocal opponent of the ambitious plans.

The Ministry of Railways, already deep in debt, is undeterred and expects to splurge another 2.8 trillion yuan between now and 2015 on the project.

State backing for the 45,000 km (27,962 miles) of high-speed track the ministry has pledged to lay by the end of 2015 means it can almost certainly find the money.

But outsiders, too, are weighing into the debate.

U.S. economist Nouriel Roubini spoke to reporters earlier this month in Singapore of his trip on the Shanghai-Hangzhou high-speed train, which connects the cities in 40 minutes.

" is half-empty and the brand new station is three-quarters empty. Parallel to that train line, there is also a new highway that looked three-quarters empty. Next to the train station is also the new local airport of Shanghai and you can fly to Hangzhou," Roubini said.

"There is a no rationale for a country at that economic level to have not just duplication but triplication of those infrastructure projects. The level of it and the cost of it is massive, and a third of it will generate zero cash," he said.

Even the landmark Beijing-Shanghai line, set to launch by the end of the month, faces uncertain profit prospects and many analysts are saying the investment in rail is too much too soon.

At a cost of 220.9 billion yuan, the 1,318-km line linking the capital and financial hub will cost one-way economy class passengers 555 yuan to start, just under the cheapest discounted air ticket.

Speeding passengers through the countryside at 300 kph, the new line will serve as the government's new model for passenger transport.

Professor Zhao cited the line from eastern Henan province's capital Zhengzhou to the Shaanxi city of Xi'an as the perfect example of a white elephant rail project.

"It is basically empty," he said. In the first six months after its launch in February 2010, the railway reported 1.98 million passengers. It was designed for 37 million a year.


"We will not slow down the pace, and there will be no cut in investments," Vice Minister of Railways Hu Yadong told a news conference last week.

The ministry's 58.24 percent asset-liability ratio -- as of March -- is no deterrent, with rail development closely linked to national development in the world's most populous country and second biggest economy.

Wang Fang, a senior project officer who focuses on China's railways at the Asian Development Bank office in Beijing, said the MOR should not worry about its debt ratio.

"A debt ratio of 60 percent itself is not worrisome. Many expressways in China have a debt ratio of 70 percent of more. What should be worrying is profitability performance," she said.

JP Morgan rail sector analyst Karen Li said a 4-7 year post-construction profitability target hinted at by MOR's chief economist Yu Bangli was not unrealistic for the line connecting Beijing and Shanghai.

But other lines may be less lucky.

"Typically for infrastructure, healthy building should outpace demand by two to three years. For high-speed rail, at this point, we may be looking at 5 to 10 years ahead of demand, in my view," Li told Reuters from Hong Kong.

"I think much of the railway investment in the past three to five years should have been put into the freight rail side," she said, helping to lower logistics costs which are much higher than in developed countries.


Some experts say the high-speed lines will have wider knock-on benefits for the freight sector and the economy.

New high-speed rails, in theory, will take passenger traffic off old tracks and open them up to freight. With per capita kilometres of rail low compared to developed countries, advocates say if it is going to build a new rail network anyway, China might as well build one that is first class.

Wang Shuang, an analyst with the Industrial Securities in Shanghai, estimates MOR operating losses in 2011 of 96.6 billion yuan, but said rail spending would still boost the economy.

"In terms of a whole region, railways will promote investment along the line in a noticeable way," Wang said, noting that every dollar spent on railway could generate three dollars in investment.

Even before the official launch of the Beijing-Shanghai line, Yu Shouhai, an investment promotion official at Taian, one of the 24 stations along the line, sees great promise. Projects, including a tourist spot called "Tropical Gardens", were launched ahead of an anticipated wave of visitors.

"The new railway line has tremendous meaning for us," Yu said. "Since the announcement of the railway blueprint, investors have been speeding up in putting money down here."

(Editing by Jonathan Thatcher)

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