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China\'s new silk road (part 3)



15 March 2011 13:09

Roger Irvine is writing a PhD on China's future at the University of Adelaide. He spent most of 2010 conducting research at Tsinghua University in Beijing. Part one of this series here; part two here.

China's emphasis on rail development is understandable given the huge demands placed on its railway system and what will be expected of it in the future. Those demands are accelerating in step with the relentless pace of its overall growth and urbanisation. Despite the expansion of China's network and high utilisation rates, rail capacity remains under great pressure, especially for freight, which has had to meet a massive requirement to transport coal and other bulk commodities. A 2007 Deutsche Bank report claimed only one third of rail freight demand was being met.

Pressures on China's passenger rail capacity are legendary, especially during peak holiday seasons such as the annual New Year Spring Festival. During such peak periods, freight services are often suspended. In 2010, China's railways delivered about 1.5 billion passenger journeys, including about 210 million who traveled during the Spring Festival alone. While rail freight demand has been forecast to almost double by 2020, passenger demand is projected to more than triple.

Clearly, then, the future gigantic demands on China’s transport systems warrant a major rail expansion. The question then becomes whether the emphasis on high-speed rail is appropriate.

The World Bank has been circumspect, but on balance has come down quite strongly in support of China's dramatic expansion of high-speed rail. The World Bank's John Scales concludes that China's high-speed network satisfies 'most of the success factors', especially on its busiest routes. Many factors, he assessed, came together in China in a way that was 'distinctly favourable' to delivering an efficient, high-speed passenger rail network.

Other external appraisals have been less cautious. Dragonomics, a Beijing-based research firm, acknowledged that, to some, China's high-speed rail might seem an extravagant indulgence. But Dragonomics saw such criticism as misguided, arguing that high-speed rail is part of a desperately needed upgrade of the country's rail system. Building the network within a short time-frame produced 'massive economies of scale', and building now while labor costs are still low is 'smarter than waiting a decade or two'. Dragonomics concluded that China is only following the example of other countries in using state funding to subsidize high-speed rail, and that it is 'an investment well worth making'.

Investment advisers JP Morgan also gave an upbeat assessment in a report that argued the enhanced mobility created by high-speed rail was already changing China's economic and business environment.

The generally optimistic tone of foreign commentary is mirrored within China, as might be expected — the great majority of Chinese academics, media and government spokespersons have been positive about the advantages of high-speed rail. The Ministry of Railways has described high-speed rail as the 'safest, fastest, most economical, most environmentally friendly, most reliable' mode of transport available.

Against this strong tide of enthusiasm, a handful of experts and observers have voiced some important counter-arguments. To these critics, the concentration of resources on high-speed rail – rather than on less expensive rail systems – mirrors an official development strategy that benefits the advanced sector of the economy and China's wealthiest citizens at the expense of still-growing income inequality between rich urbanites and the rural poor. 

Professor Zhao Jian at Northern Transport University argues high-speed rail is better suited to countries with smaller territories and that the economic value of time saved is less in China. He believes high-speed rail will be unaffordable for most people and that his views have been proven by serious losses incurred on the newest lines. He asserts that due to the waste involved in China's 'blind pursuit' of high-speed rail it will face huge economic, social and political risks, and that a major debt crisis is looming that could become a serious drag on economic development. He believes the country's transport needs would be better met by a larger national network that avoids excessive reliance on costly high-speed trains. 'The government just wants to have the biggest and fastest number one train set in the world', he says.

Similar views have been expressed by Michael Pettis, a professor of finance at Peking University, who thinks high-speed rail is a 'trophy' for a country that, for its level of development, probably already had the best infrastructure in the world. According to Morgan Stanley's Stephen Roach, China's investment in fixed assets – much of it for rail – accounted for 45% of GDP in 2008. This, he declared, was 'ridiculous, unsustainable' for any economy.

China Daily has reported a Shanghai survey which found that only 10% of respondents thought high-speed fares were fair and acceptable. There have been numerous other references in China's news media to low ticket sales for several high-speed lines and to the high cost of tickets. Many trains are reported to run with 50% or more of seats unoccupied; during my own use of the Guangzhou to Wuhan line last year, less than 10% of seats were occupied.

The prospect of future difficulties for China's high-speed rail is reinforced by reports from Financial Times sources that the Chinese Academy of Sciences in November 2010 presented a report to the State Council highlighting concerns about unsustainable debt levels and under-utilisation of new lines. Provincial governments – having also caught the fast train fever – are said to be proposing a further huge expansion of the network.

The South China Morning Post recently carried an article quoting sources in China who believe the cement quality of high-speed rail track is being degraded by the use of inferior fly ash, which may shorten its lifespan and create safety problems. And in February 2011, Railways Minister Liu Zhijun was removed from his position for 'severe violations of discipline', leading the New York Times to speculate that this raised doubts about the safety, financial soundness and long-term viability of China's high-speed railways. Also, an analysis by Minsheng Bank reportedly found the Ministry's indebtedness could reach 70% of its assets by 2020, and that high-speed rail might remain a money-loser until 2030.

These reports give increased credibility to the critics' arguments and reservations, but they seem unlikely to interrupt the current momentum. High-speed rail is programmed to be one of the pillars of economic development in the new Five Year Plan. According to the Beijing Review, the Ministry of Railways' vision is that, by 2020, China's high-speed rail network will extend over 50,000km (presumably including dual-use freight/passenger lines) connecting all provincial capitals and cities with populations over 500,000. The network would be accessible to 90% of Chinese, allowing them to 'travel across the country with ease'. Neighbouring provincial capitals would be only one to two hours apart, and provincial capitals would be only a half to one hour apart from other cities in their province.

The audacity and breathtaking ambition behind China's plans for high-speed rail are clear. If it succeeds, it will be the envy of the world, especially among countries that are similarly expansive geographically. If it fails – and the most likely cause of failure would perhaps be if anticipated future economic growth is more disappointing than expected – there would be difficult questions to answer in attempting to justify the resources expended.

Nevertheless, superlatives abound. China's current high-speed railway development has been variously and justifiably described as the biggest, the most ambitious and the most technologically-sophisticated rail expansion in history. By around 2015, China is likely to have built a new mass transport mode on a scale unequaled anywhere else in the world.  Whether it will prove to be a catalyst for further growth or a monument to a regime that overreached itself remains to be seen.

Photos by the author.

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