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An exit of a subway station currently in operation in a sparsely populated area in Chongqing   © Reuters

How new rules jeopardize China's subway projects

Cities with previously approved plans face prospect of half-finished networks

LONDON -- In an effort to rein in spending and tackle China's mounting debt, Beijing recently introduced stricter regulations for urban transportation projects. The new rules, however, threaten to leave certain cities with previously approved plans in a tight spot, an analysis finds.

On July 13, the State Council announced the introduction of tighter approval criteria for its policy on subway and light rail system construction, which was established in 2003.

Of 43 cities with approved plans, 14 fell short of the new requirements concerning population size, gross domestic product, general budgetary revenue and government gearing -- a measure of debt to total fiscal revenue.

An incomplete transportation network is worse than none, said Ada Li, vice president and senior analyst for Project & Infrastructure Finance at Moody's, who conducted the analysis.

"We will see examples of cities where we have metros, but not really useful metros," she said. "Cities without a metro future now find themselves in a parlous state."

The Moody's report suggests suspending work on existing projects will result in fiscal waste and weaken the long-term business fundamentals of transportation companies. 

"If they keep building, and that is what they likely will do, the harder it will be for them to meet financial specifications in the future," Li said. "There is a spiral, a chicken and egg question."

Baotou in Inner Mongolia is the only city among the 43 where construction has been suspended altogether. Work was halted last November due to cost concerns. In Hohhot, in the same province, a suspension was imposed before construction had begun.

In general, first- and some second-tier cities meet the new demands, while the majority that fail tend to be second- and third-tier cities.

Nine of the 14 cities that failed to meet the requirements did so for the government gearing criterion. Of those nine, seven already had networks that were at least partially operational and now face uncertainty regarding future expansions.

The findings also reveal an uneven geographical spread. The cities that fall short on financial grounds also tend to be in inland areas and have problematic debt to fiscal revenue ratios. Five of the nine are located in the north and northeast, areas hit hardest by the decline of heavy industries.

Harbin, Heilongjiang Province, is at the acute end of the scale. With an urban population of more than 5 million and a regional GDP of 635 billion yuan in 2017, it satisfies certain criteria. Cities need to be home to at least 3 million people and have an economic output of 300 billion yuan.

Part of Harbin's subway network went into operation in 2013, and it was partially extended last year. However, it fails the new requirements due to government gearing with most of the work yet to be completed.

Moody's predicts that the introduction of the new limits is unlikely to lead to large-scale cancellations and writing down of incomplete networks. A number of cities could look to alternatives, Li said. "Drilling underground is something very expensive. There are cheaper options, such as light-rail, trams, busses, instead of building extremely costly metros."

And the new regulations could lose sway now that the Chinese government wants to cushion the impact of the escalating trade war with the U.S.

Beijing is expected to pledge an additional $10 billion for railway projects, including a number of subway networks.

On Aug. 10, the authorities in Changchun announced that the National Development and Reform Commission had approved a 78.7 billion yuan urban rail project for the city. 

Datawatch is a series jointly produced by the Nikkei Asian Review and FT Confidential Research.

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