China’s High-Speed Rail Story Going Bust?22 July, 2011, 12:08. Posted by Zarathustra
Tags: Economy, High-speed Rail, Ministry of Railways
Latest: Now the High Speed Rail Trains Crash!!
Here, I have already noted that the massive investment plan in high speed rail (which does not work very well by the way, with repeated failures in the Beijing-Shanghai segment within days of opening) has led to a huge mountain of debt.
And because the tickets are probably too expensive for the public anyway, the rosy forecasts before building it were proved to be overly optimistic. This is hardly surprising, as I cited studies by Bent Flyvjerg in 10 reasons to short China that cost overruns are very common, and passenger forecasts are often too optimistic. This is exactly the case for the Chinese high-speed rail, in a much more massive scale.
As the problems become more visible now, people are naturally worried, and the Ministry now has difficulties in raising more money. Mingpao reported that the Ministry of Railways attempted to sell RMB20 billion of 1-year bond, but received only RMB18.73 billion bids. This is, according to the report, the 7th time since the start of this year that the Ministry sell bonds, but it is the first time it failed to sell all. Taken all 7 times together, the Ministry has raised RMB105 billion from the debt market.
Let us run through a few numbers on the Ministry’s financials. By the end of first quarter, the Ministry had around RMB2 trillion of debt, and lost RMB3.76 billion in the first quarter alone. The latest information also points out that in the full-year 2010, the net profit of the Ministry was a mere RMB15 million with revenue at RMB685.7 billion, while interest expense amounted to a whopping RMB150.1 billion (!).
This is hardly a reassuring story, a demonstration of the problems of a debt-driven investment-led growth model of the Chinese economy.