China's super-railways on track for debt troubles

Reuters


(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By John Foley
HONG KONG, Aug 15 (Reuters Breakingviews) - China's high-speed railways may be headed towards a slow-motion debt crisis. The government plans to spend 2.8 trillion yuan ($438 billion) in the next five years souping up the system, of which at least half is likely to come from borrowings. It is very hard to see how that will all be paid back.
The plan for China's super-fast railways is impressive, and necessary. The mooted 16,000 kilometres of lines due by 2020 is more than exist in the world today. China is also ideally suited to building high-speed rail. Whereas high-speed lines typically cost from $35 million per kilometre, China's cost around $15 million, according to a person familiar with such projects.
Funding has so far been easy. The Ministry of Railways uses the proceeds of bond issues, freight surcharges and ticket sales to provide equity. Local governments add more equity, while the remainder of funds come from bank loans. The typical project is 50-50 equity and debt, though the debt share has been rising, say people familiar with the situation.
The trouble is that most Chinese passengers aren't prepared to pay high prices to shave a few hours off their journey. Tickets on China's new lines work out at $0.06 per kilometre -- around half the fares elsewhere in Asia, according to the World Bank. Construction delays and more rigorous attention to safety after July's fatal collision between two trains in the coastal city of Wenzhou will probably push costs up, and demand down.
That makes an eventual debt problem more likely. Railways, with huge up-front investment and a long payback time, are notorious for creating debt overhangs, even in rich countries. That said, even a cash-burning rail system brings benefits. It will free up clogged freight lines, create growth in deprived rural areas, and reduce high-polluting air travel. So it is likely the government will stand behind the 2.1 trillion yuan outstanding debts of the Ministry of Railways, and that a block on starting new projects will prove temporary.
But that's little comfort to private investors in banks who have lent hand over fist. Loans to specific projects have much less chance of being made whole. China Construction Bank has lent the equivalent of 2.8 percent of its regulatory capital to a single railway operator. Lending for "transportation" has grown more than 60 percent in two years at the four biggest banks, with collateral backing as low as 30 percent. When payday comes due, it's the bank shareholders who could find themselves taken for a fast ride.


CONTEXT NEWS
-- China's second-biggest train maker, China CNR Corp, said on Aug. 12 it would withdraw 54 bullet trains used on the new Beijing-to-Shanghai line for safety reasons, three weeks after a crash on another line near the coastal city of Wenzhou that killed at least 40 people.
-- Official news agency Xinhua said that trains on the line, which opened in early July, would be cut by a quarter, and that the top speeds on the fastest trains would be reduced to 300 kilometres per hour. Meanwhile, approval for new railway projects had been suspended pending safety checks.
-- China plans to build a 16,000 kilometre high-speed rail network by 2020, more than the rest of the world put together, according to a World Bank analysis. In 2010 the government invested 600 billion yuan ($94 billion) in rail construction. From 2011 to 2015 the Ministry of Railways plans to invest 2.8 trillion yuan ($438 billion).
-- The Wenzhou crash on July 23 was initially blamed on lightning and then on faulty signals technology. On Aug. 12 a senior investigator told Chinese media the crash and could have been avoided. China CNR Corp's shares fell 23 percent from the day before the crash, to the close of trading on Aug. 12.
-- China's rail network is majority-owned and managed by the Ministry of Railways, one of the three state authorities allowed to issue its own bonds. China's domestic ratings agency, Dagong, reaffirmed the triple-A rating of the ministry on Aug. 13, saying it still enjoys strong government support.
-- The ministry issued 20 billion yuan ($3.1 billion) worth of three-month bills in the interbank market on Aug. 8, at a yield of 5.6 percent, higher than longer-dated bonds from Chinese government agencies. Its outstanding debt at the end of June was 2.1 trillion yuan ($328 billion).

-- Reuters graphic of China's railway and fixed-asset investment:
http://link.reuters.com/bam82s
-- Reuters map of China's high speed rail network:
http://link.reuters.com/zas23s
-- Reuters Insider TV, Rail crash threatens property development plans:
http://link.reuters.com/nyr23s

(john.foley@thomsonreuters.com))
(Editing by Peter Thal Larsen and Sarah Bailey)