ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronEye IconIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintSite TitleTitle ChevronIcon Twitter

China pays a high price for world's fastest train

Breakneck pace of railway expansion leads to mountain of debt

China's "Fuxing" fast-speed train service between Beijing and Shanghai resumed operations at 350kph on Sept. 21, reclaiming the title of world's fastest train.   © Reuters

TOKYO -- When China recently reclaimed the title of having the world fastest train, it might have been a moment of national celebration. Instead, there were worries about whether the cost was worth it.

The "Fuxing" (rejuvenation) high-speed train service between Beijing and Shanghai returned to operating at 350kph on Sept. 21. For six years, it had been limited to 300kph following a crash in 2011 when two high-speed trains collided, killing 40 people and injuring about 200.

Soon after the Beijing-Shanghai line returned to full speed, the internet began buzzing with rumors that train fares would also rise in line with the higher speed.

Perhaps people would have been more enthusiastic -- as the country heads into the Communist Party's congress in October -- if concerns were not so great about the mountain of debt that the country's ambitious railway program has built up.

China Railway Group -- the state-owed company that operates high-speed trains -- now groans with over $700 billion in debt.

Speculation is rife that fares must rise to service the debt. High-speed train fares for the route between Shanghai and Shenzhen did in fact rise 20-60% in April.

But there has been no fare increase for the Beijing-Shanghai route yet. First- and second-class fares have stayed at 933 yuan ($140) and 553 yuan, respectively.

China Railway's train service network has grown to over 20,000km in total, but many of the lines are operating in the red.   © Reuters

Established in 2013, when the Ministry of Railways was disbanded, China Railway enjoys an effective monopoly on the country's railway services. Construction on a network of high-speed train lines began in 2005, and has expanded to over 20,000km in total length.

Under the current five-year plan to 2020, nearly 10,000km of high-speed train lines will be added, with the aim of connecting 80% of all cities with a population of 1 million or more.

The debt load of China Railway has continued to spiral, from 658.7 billion yuan owed by the Ministry of Railways in 2007, to 2.79 trillion yuan in 2012.

The debt grew from 3.22 trillion yuan at the end of 2013 to 4.77 trillion at the end of June this year. China Railway had to shell out 77.9 billion yuan to service the debt in 2015, and another 75.2 billion yuan in 2016. Investments have been especially large in high-speed train lines.

At the same time, China Railway's annual revenue has been declining since 2014 as the economy has slowed. In 2016, it had sales of 907.4 billion yuan.

With the government maintaining a policy of keeping fares down, sales are unlikely to grow much, even if the economy turns up.

Every year, the company loses money in the first half, but reports a profit for the full year as the bottom line is supported by state subsidies in the second half.

China Railway turned a final profit of 600 million yuan in 2015, and 1 billion yuan in 2016, due to generous government support.

This year, China Railway posted a 2.9 billion yuan loss for the first six months, but will likely report a profit for the full year.

The Beijing-Shanghai line, which opened in 2011, started turning a profit in 2014. Other short-distance lines in industrialized coastal areas, including Shanghai-Nanjing, Nanjing-Hangzhou and Guangzhou-Shenzhen, are also profitable. But most other lines lose money.

China's overall plan to expand its train network, including general lines, is expected to cost an additional 2 trillion yuan to 3 trillion yuan by 2020.

Even if China Railway does not have to cover all the construction costs by itself, its debt burden will grow, requiring more government subsidies.

There has been a growing chorus for fundamental reforms of the troubled railway operator.

Some have proposed spinning off profitable operations into a separate entity to seek private-sector investment and involvement in management.

Lessons from Japan

The current state of China Railway is reminiscent of that of Japan's national railway operator several decades ago.

Like China Railway, Japanese National Railways was spun off from the transport ministry after World War II. JNR fell into the red when the first Shinkansen bullet-train service, the Tokaido Shinkansen line, started operating in 1964. Yet the opening of the world's first high-speed train service did much to lift national pride as a symbol of postwar reconstruction.

But the construction of shinkansen lines around the nation was a major factor behind JNR's ballooning debt.

Building the Sanyo Shinkansen between Osaka and Hakata in southern Fukuoka Prefecture starting in the late 1960s cost 910 billion yen (around $2.5 billion at the time). The Tohoku Shinkansen line, which opened in the early 1980s in the northern part of the main island of Honshu, required a staggering 2.66 trillion yen.

JNR had to bear much of the financial burden, which was exacerbated by the opening of many money-losing local lines amid an environment of pork-barrel politics. For more than two decades, JNR struggled with growing debt before being divided and privatized in 1987.

Kazunori Kado, a professor at the Hokkaido University of Education, Asahikawa Campus, has argued that excessive spending was the main reason for the company's financial collapse. Investments in the construction of the Tohoku Shinkansen pushed it beyond its limits, he said in a thesis.

The company's financial soundness was further undermined by the government's policy of curbing fare increases until the mid-1970s.

With its finances in a shambles, JNR eventually raised train fares by 50% in 1976, a desperate move that backfired, driving customers away and putting JNR into a worse position. Total debt ballooned to 37 trillion yen at the time of privatization, forcing it to spend more than 1 trillion yen annually to service the debt.

Each year the company received 600 billion yen to 700 billion yen of state subsidies. But the funds did little to address the root problems.

Eventually, the government took over JNR's debt after it was turned into the Japan Railways group of private-sector companies. The government spent 24 trillion yen from its general-account budget to pay off part of the debt, but at the end of fiscal 2015, there was still 17.7 trillion yen of JNR debt to pay back. The debt has thus been shifted to future generations of taxpayers.

Perhaps costs should not be the only factor in planning and evaluating such important social infrastructure projects. But there should probably have been a more careful debate about the costs of the shinkansen program.

Will Beijing similarly shift the burden of its high-speed rail program to future generations? However the story ends, China too will have to face the formidable challenge of dealing with a towering debt from its high-speed rail program.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Try 1 month for $0.99

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends July 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to the Nikkei Asian Review has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media