China’s Bullet Trains: Back on Track

On a single day, Dec. 28, 2013, China opened an unprecedented six new high-speed railway links spanning nearly 2,000 kilometers, pushing its total high-speed track to more than 12,000 km.

That has vaulted the country back into the forefront of global high-speed service after a dark period that included the arrest and prosecution of the head of the agency for corruption, and a devastating crash due to faulty equipment in which two trains traveling on the Yongtaiwen railway line collided on a viaduct, killing 40 people and injuring at least 192, 12 of which were severe. The government then compounded the problems by cutting the investigation short and attempting to bury the cars that had fallen off the viaduct. The crash had a profound impact not just in the development of high-speed rail but, along with a rash of scandals such as the adulteration of baby formula, on public confidence in the government itself, spurring Beijing to spare no effort in putting the system right.

The opening of the new lines is thus an indication that rail service is back as a vital component of the country’s economic transformation. The resurgence is also emblematic of President Xi Jinping’s determination to clean out corruption. Former Minister of Railways Czar Liu Zhijun was sentenced to death in April with a two-year reprieve for allegedly accepting the equivalent of US$250 million in bribes. It was one of the highest-profile corruption cases in years, eclipsed only by the conviction and life sentence for former Chongqing boss and politburo member Bo Xilai.

The unprecedented lengthening of the grid on a single day is not just a fact, but a major statement by the newly-christened China Railway Corporation. In August 2013, the State Council issued a document to "reform the investment and financing system of railways and to accelerate railway construction." Following that, the CRC increased the number of new projects for 2013 to 47 from 38. According to the company’s latest information, another 12,000 km of high-speed rail is under construction. China is targeting 19,000 km in operation by 2015.

The Ministry of Railway or its successor, the China Railway Corporation, have set an extremely aggressive list of indicators of 2015 targets. For the past three years, the indicators have not moved significantly. Thus, the momentum for the next two years has to be much quicker if China wants to achieve the targets. In particular, passenger throughput is expected to almost double by 2015 from now. China also has to commence operation of an additional 10,000 kilometers per year when the total length of railways in operation only averaged less than 3,000 km annual construction for the past three years.

The high-speed system is not only extensive and growing, it is inexpensive for its users. A second-class seat on the newest bullet train service, stretching 513 km from the southern capital city of Shenzhen to Xiamen, a major hub in Fujian, costs just RMB150.5, the equivalent of US$25. That distance is farther than from New York to Montreal at a fraction of the RMB800 cost of a flight. The high-speed journey will be a scenic 3-hour, 41 minute skip, down from the agonizing 13-hour ordeal on regular trains.

The new route promises to save time and money for more than 700 million people living along the coastal linkage. The opening of the new links is also just in time for the upcoming chunyun, or Lunar New Year travel season between Jan. 16 and Feb. 24, during which hundreds of millions of people travel home to spend their vacations. Ministry of Transportation officials forecast this year’s chunyun at 3.2 bn passenger trips, up 5.8 percent from last year, while the high-speed rail operator CRC expects strong 7.9 percent growth in passenger throughput to 258 mn trips in the approaching 40-day period.

China now boasts a high-speed rail network that spans more than 12,000 km of track, a key milestone in the history of the country’s railway development. The world’s other top high-speed rail-operating countries are Spain at 3,100 km, Japan at 2,664 km, and France at 2,036 km. The US has zero; its “Acela Express” unfortunately has to share track with commuter trains.

Four vertical and four horizontal routes form the backbone of the new system, the so-called “4+4” railway grid. The national routes weave a comprehensive web stretching as far north as Harbin bordering eastern Russia, as far south as Shenzhen connecting Hong Kong, and as far west as Kunming in Yunnan province, China’s gateway to the ASEAN community. The “4+4” lattice stretches 14,613 km and is three-quarters completed as of now, and will be 95 percent completed by 2017 and in full service by 2019. Intercity high-speed routes will define the next stage of mileage extension, building around the national architecture. We estimate more than 2,000 km of city-to-city routes will come online in 2014 and 2015.

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In the first five years of operation between 2008 and 2012, the system reported compounded annual growth in passenger volume of 170 percent, compared with a negligible increase in traffic throughput for ordinary trains. In 2013, roughly 550 million travelers have got on board the high-speed trains, up from 388 mn passengers in 2012, meaning that more than a quarter of riders are now choosing the bullet trains.

China’s overall network is likely to have carried 2.1 billion passengers in 2013, up 11 percent from 2012, but that is still far from the high bar set in the State Council’s 12th-Five Year Plan, which stipulates that China’s railway network will transport 4.0 bn passengers annually by 2015. That figure may be excessively ambitious in just two years’ time, but there is no reason to doubt that the current growth trajectory can’t extend into the coming years as more new routes are put into service. We anticipate that the bullet trains will service more than 40 percent of railway travelers or 1.1 billion-plus passengers annually by 2015, up threefold from 2012.

China Railway Corporation replaced the Ministry of Railway in March 2013, breaking one of the country’s biggest and most corrupt monopolies, and is set up as a 100 percent state-owned entity under the Ministry of Finance. Therefore, all of CRC’s outstanding bonds and bank borrowings (RMB2.4 trillion as of Sep. 13) benefit from implicit guarantees that the central government will make bailout payments if necessary.

But this remains a low likelihood scenario. The unfortunate suicide of the China Railway President Bai Zhongren this week, reportedly from depression, shouldn’t be construed as a signal of problems within the system. Rumors that he had killed himself over the company’s debt appear to be misleading. A report by Lianhe Credit Rating Co., a Chinese affiliate of Fitch Ratings, indicates that the rail entity generated positive earnings before interest, taxes, depreciation and amortization for the past three years (RMB207 bn in 2012) with healthy growth prospects in 2013. On a recurring basis, the national operator also receives a strong dose of state funding while its annual bank borrowings have been relatively constrained since 2010 as annual construction expenditures steadied at roughly RMB600 billion.

The four-by-four infrastructure began construction in the late 1990s and made its global debt during the Beijing Summer Olympics with the operation of Beijing-Tianjin Intercity High-Speed Railway on August 1, 2008. In two years, the national backbone linking the regional hubs will be basically completed while the build-out of localized networks will continue to enrich the system’s connectivity. The Chinese architecture has adopted both European and Japanese-based technologies, meaning its state-backed railway equipment manufacturing sector is capable of exporting a full suite of trains for different climates.

2014 is very possibly the year that China inks its first overseas high-speed railway deal, with the contract most likely falling somewhere within the Eastern European block, state-owned media suggested in late 2013. The sale would be a major triumph for Premier Li Keqiang, who has been busy on the road most recently in last October in Thailand, then November in Europe promoting the Chinese system. The successful export of high-speed rail technologies and operational knowhow would be a major vote of confidence for the industry, which already boasts equipment exports to more than 50 countries around the world including Malaysia and Turkmenistan.

China has long planned three major bullet train linkages with its neighboring countries, from the cornering provinces of Heilongjiang, Xinjiang, and Yunnan. Through the Northeast gateway of Harbin, the Eurasian route would connect Beijing and Russia’s Moscow. From Urumqi in the Northwest, a Central Asian path trails the ancient Silk Road to Kazakhstan, Uzbekistan, and Iran. And finally, the Southwest center of Kunming is expected to serve as a starting point for a high-speed ASEAN journey to Singapore via Myanmar and Thailand.

(Steve Wang is research director and Chief China Economist for the Hong Kong-based REORIENT Securities Ltd. He is a regular contributor to Asia Sentinel.)