Tuesday, March 01, 2011

Corruption and Debt Concerns Add to Growing Criticism of China’s High-Speed Rail Network

China Financial Markets: Trains, Plains and Inflation Rates

China's Ministry of Railways is one of the world's largest employers, with more than 2.5 million employees across China and a vast network of suppliers. In recent years, high-speed rail projects have been a key component of China's plans to develop world-class infrastructure that will further remove obstacles to economic growth. More than 7,500 kilometers of high-speed railway track have been laid in the past five years and another 4,500 kilometers of high-speed track is scheduled to be laid this year. However, corruption scandals, public debt worries, and safety concerns are causing many government officials and analysts to question the wisdom of these high-speed rail projects.

Supporters of high-speed rail say that the projects are necessary to spread economic development from the coasts to the relatively poor inland provinces. They argue that high-speed rail moves people and goods more quickly than autos and that in the long-run, rail is more cost-effective than maintaining another network of congested highways. To support their claim, they show that China has far less infrastructure for its size and population than developed countries like Japan.

Critics argue that it is improper to compare China's infrastructure level with Japan because China's labor productivity is still far below that of developed countries. They argue that economically unjustifiable rail projects are incentivized by inexpensive loans from state-run banks and pressure on local policymakers to achieve short-term economic growth targets. Critics within the government say that the Ministry of Railways' combined policy and management functions lead to wasteful spending and corruption because policymakers can directly benefit from kickbacks from the construction industry.

This month, China's Railway Minister was removed from his position following a corruption probe. In response, the state-run newspaper People's Daily stated that the Minister’s removal will not slow the growth of rail construction. However, increased central government oversight of rail projects may naturally lead to slowed investment by state-run banks. Further, concerns with construction quality also underlie the removal of the Railway Minister. The South China Morning Post reported that China’s supply of a material necessary to build foundations for high-speed rail lines is not even one-tenth of the amount necessary to meet such ambitious building goals. As a result, Chinese rail and material engineers suggest that the use of substitute materials will result in rail lines with half or less of their originally expected lifespan.

Finally, recent financial analysis of high-speed rail projects casts doubt on their economic viability. Analysis by China Minsheng Bank shows that even high ridership might not prevent the high-speed network from potentially operating at a loss for the next 20 years. Further, Minsheng’s report shows that the Ministry of Railways' debts are equal to 56 percent of its assets. As a result, the Ministry has been selling stakes in its railways to state-controlled banks to help finance the projects.

Discussion Questions:
- Even if the high-speed rail projects are not profitable, can the rail lines still be justified on the grounds that they will allow investment to move inland more easily and in the process reduce income gaps between the relatively wealthy coast and poorer inland areas?
- In large bureaucracies, does splitting policymakers from management functions like sales and procurement lead to improved governance or greater inefficiency?

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