China banks on rail boom to fire inland growth

By Alan Wheatley, China Economics Editor – Analysis

BEIJING (BestGrowthStock) – In southwestern Yunnan province, giant concrete pillars bestride the fields, tracing the route of one of scores of new rail lines that China is building.

In western Xinjiang, construction crews toil on a lonely line crossing the desert wastes to the Silk Road city of Kashgar.

From one end of the country to the other, China is in the midst of a railway boom that promises to transform the world’s third-largest economy.

By making it easier to move people and goods, the railway mania will gradually shift the center of economic gravity inland, accelerating the development of central and western China in an echo of America’s experience in the 19th century.

Jing Ulrich, chairman of China equities and commodities at J.P. Morgan, also sees comparisons with the construction of the U.S. interstate highway system and Japan’s Shinkansen high-speed rail network. Both wrought far-reaching socio-economic changes.

“However, due to the immense scale of construction, faster service speeds and China’s vast population, the transformative impact may be even more profound,” she said in a recent report.

As better transport links encourage manufacturers to relocate away from the coast, demand for property in the interior will grow, lifting consumer sentiment and retail sales. The railways will also be a boon for tourism, Ulrich said.

BIG BUDGET

Taking freight and passenger traffic together, China already has the world’s busiest railway. But measured by the size of the country and the needs of its 1.3 billion population, it is puny.

The density of the network, measured by kilometers of line per million inhabitants, is less than a tenth of that of Russia, the United States or Canada, a seventh of the European Union’s and about a third of Japan’s, according to the World Bank.

This sparse network, totaling 86,000 km at the end of 2009, is so overburdened that it carries a quarter of the world’s railway traffic on about 6 percent of the world’s lines.

It is no wonder that China suffers periodic energy shortages because coal trains are delayed in reaching power stations as they are shunted into sidings to make way for passenger trains.

Well aware of the problem, the government turned the financial crisis into an opportunity to fast-forward its long-term plan to lengthen the network to 120,000 km by 2020.

Giving the economy a shot in the arm, railway construction created about six million jobs last year, generating demand for 20 million metric tons of steel and 120 million metric tons of cement.

“If the policy is that large cash infusions create jobs, then from a transport perspective railways is certainly the place where the financing is necessary,” said John Scales, the lead transport policy specialist for the World Bank in Beijing.

GIANT STRIDES

By the end of 2009, work was under way on no less than 33,000 km of lines, according to analysts at Macquarie.

With the Ministry of Railways budgeting a 17 percent increase in spending this year to 823 billion yuan ($120 billion), they believe the 120,000 km target could be reached as soon as 2015 and see a good chance it will be raised to 150,000 km.

The economic case for expanding the rail network is clear-cut. During a country’s development phase, total demand for transport tends to grow faster than per capita income.

But some critics say China is putting too much emphasis on high-speed rail lines capable of accommodating speeds of up to 350 km an hour.

China already has the longest operational high-speed network in the world, at 6,552 km, and intends to double that to 13,000 km by 2012 by upgrading existing track and building new lines.

When the line linking Beijing and Shanghai opens by early 2012, the journey time will be cut to four hours from 10.

China is rightly proud of the giant strides it is making. It is offering to build a high-speed rail line in California and is bidding for a contract to link Mecca and Medina in Saudi Arabia.

At home, the aim is to reduce if possible the travel time to each provincial capital from second-tier towns in that province to two hours or less, bringing economic convergence in its wake.

SOCIAL STRAINS

Yet Zhao Jian, a professor at Jiaotong University in Beijing who specialized in rail economics, is scathing of the “blind pursuit of speed”. He says China could have built an extra 30,000 km of conventional track with the money saved from “extravagant” high-speed lines.

China, he argues, does not have the technological experience to be sure of operating such lines safely. Moreover, high-speed trains gobble energy and subsidies.

“There is no high-speed railway in the world that can be financially self-sustaining. The large-scale construction of high-speed railways passenger lines in China will definitely be confronted with huge risks,” Zhao told the monthly Chinese-language journal Comprehensive Transportation.

High-speed rail travel could even pose social and political risks, he added, since fares on the new trains are three times higher than on ordinary trains. What’s more, the Ministry of Railways is deliberately reducing the frequency of slower trains to force passengers to use the new services.

“This will be met with strong social discontent,” Zhao said.

Scales, the World Bank expert, sees things differently.

“In other parts of the world nobody would think of designing new passenger lines for less than 350 km/h. So it’s very reasonable,” he said.

“And remember that many of the dedicated passenger lines are not built to move passengers, but to get passengers off the freight lines. That’s where the real bottlenecks are,” he added.

(Editing by Mathew Veedon)

China banks on rail boom to fire inland growth