To Go Fast Is Glorious

When China announced in 1998 that it would build a high-speed train line between Beijing and Shanghai, railway companies and politicians in Japan, France and Germany licked their chops.

China would have neither the technology nor the capital for such an ambitious project, they thought, and so one of the three would get the deal, leaving a huge contract open for somebody to build.

A decade on and how wrong the foreigners proved to be. An announcement by the State Council on October 30 of a “leading group” to oversee construction left the foreign companies with only bit parts to play in the second biggest rail project in China’s history, after the Qinghai-Lhasa line that opened on July 1, 2006.

Beijing has nearly all the capital and technology it needs. Foreign equity will be no more than 10 per cent of the stock of the Beijing-Shanghai High-Speed Railway Corporation, the entity that will build the line and will have a registered capital of 110 billion yuan. Bank loans and bond issues will raise another 110 billion yuan, according to press reports.

The numbers on the project are staggering, even in a country of superlatives. The latest estimate of the cost is around 220 billion yuan ($29.5 billion). The line will run for 1,318 kilometers through 20 tunnels, over 28 bridges and into 21 stations. It will require bridges over the Yellow and Yangtze rivers and will run parallel to the existing Beijing-Shanghai line, carrying only passengers and allowing the older line to devote itself exclusively to freight.

Running at a speed of 300 kilometers per hour, it will cut the journey time from the current 10 to five hours, on the busiest route in China, which accounts for 10.2 per cent of national railroad passenger volume. It will carry 80 million passengers a year after completion in 2010.

The numbers have the country’s biggest state institutions fighting for a stake, convinced that it will be a golden goose that will lay eggs for years to come. The fare will be 600-700 yuan, half the standard air fare.

Front-runners for major slices are the Bank of China, the Industrial and Commercial Bank, China Construction Bank, CITIC Securities and the National Social Security Fund. The country’s three biggest insurers, China Life Insurance, Ping An and People’s Insurance also want stakes.

According to Chinese media, the only foreigners in the bidding are Panin Holdings of Indonesia and an unnamed private equity fund.

The biggest stakeholder will be the Ministry of Railways, which is likely to invest 40 billion yuan for a stake of 35 per cent. The local governments of the regions through which the line will pass – Beijing, Shanghai, Tianjin, Hebei, Shandong, Anhui and Jiangsu are likely to invest a total of 20 billion.

A spokesman for the ministry said that negotiations on the composition of the new rail consortium were still being worked out and the final allocation of shares had not been decided. He declined to give details.

Two issues are delaying agreement. One is the form of investment, with Anhui, for example, wanting its share to be in land, not money. The other is the form of compensation for those who occupy the 4,470 hectares of land through which the line will run. Since it is the most prosperous land in China, the compensation will be substantial, up to 23 billion yuan.

In this story, the ministry is the big winner. For nearly 10 years, it has resisted pressure from other ministries to start work on the line using a foreign system, the Japanese Shinkansen, France’s Train à Grande Vitesse (TGV) or the German InterCity Express. It held off by insisting that it had the technology to build a comparable line, the foreign models were too expensive and such a strategic project should not be given to a foreign firm.

It bolstered its arguments by rapidly improving the speed and standards of domestic trains on major routes.

For their part, backed by their respective governments, the Japanese, French and Germany companies invested time, money and manpower in lobbying for the tantalizing line, which would have been the biggest and most prestigious foreign project for any of them, if they had won.

Because of historical antagonisms, Shinkansen’s chance of victory was always small and disappeared when former Taiwan President Lee Teng-hui chose it in 1999 for the Taipei-Kaohsiung route. Costing US$15 billion for a 336-km route, it opened on January 7, 2007

Initially, the Ministry of Railways also said that it would use only domestic technology but, in May 2006, invited foreign companies to bid. Alstom, Siemens and Mitsubishi-Kawasaki are considering bids, especially for the rolling stock.

To raise funds for its stake in the umbrella company, the Ministry of Railways has applied to the regulator for permission to list A shares in its subsidiary, China Railway Company, followed by an issue of H shares. It aims to raise US$2 billion in Shanghai and US$1.8 billion in Hong Kong.

In the current bull market, it should have no trouble raising the money, especially as there are only two railway companies listed on the stock market, one carrying coal and the other passengers from Guangzhou to Shenzhen.

In the current five-year plan, Beijing has promised to invest 1.25 trillion yuan in train lines and equipment and 250 billion yuan for locomotives and rolling stock. By the end of 2010, the ministry aims to have laid an additional 17,000 kilometers of track – half as much as in all of Germany – to create a national network of more than 90,000 kilometers.

In such an ambitious plan, how could the train on China’s premier route be carrying a foreign flag?