China rail: China's high-speed railways may be headed towards a slow-motion debt crisis. The government plans to spend 2.8 trillion yuan ($438 billion) in the next five years souping up the system, of which at least half is likely to come from borrowings. It is very hard to see how that will all be paid back.
The plan for China's super-fast railways is impressive, and necessary. The mooted 16,000 km of lines due by 2020 is more than exist in the world today. China is also ideally suited to building high-speed rail. Whereas high-speed lines typically cost from $35 million per km, China's cost around $15 million, according to a person familiar with such projects. Funding has so far been easy. The Ministry of Railways uses the proceeds of bond issues, freight surcharges and ticket sales to provide equity. Local governments add more equity, while the remainder of funds come from bank loans. The typical project is 50-50 equity and debt, though the debt share has been rising, say people familiar with the situation.
The trouble is that most Chinese passengers aren't prepared to pay high prices to shave a few hours off their journey. Tickets on China's new lines work out at $0.06 per kilometre - around half the fares elsewhere in Asia, according to the World Bank. Construction delays and more rigorous attention to safety after July's fatal collision between two trains in the coastal city of Wenzhou will probably push costs up, and demand down.
That makes an eventual debt problem more likely. Railways, with huge up-front investment and a long payback time, are notorious for creating debt overhangs, even in rich countries. That said, even a cash-burning rail system brings benefits. It will free up clogged freight lines, create growth in deprived rural areas, and reduce high-polluting air travel. So, it is likely the government will stand behind the 2.1 trillion yuan outstanding debts of the Ministry of Railways, and that a block on starting new projects will prove temporary.
But that's little comfort to private investors in banks who have lent hand over fist. Loans to specific projects have much less chance of being made whole. China Construction Bank has lent the equivalent of 2.8 per cent of its regulatory capital to a single railway operator. Lending for "transportation" has grown more than 60 per cent in two years at the four biggest banks, with collateral backing as low as 30 percent. When payday comes due, it's the bank shareholders who could find themselves taken for a fast ride.