Zhu Yi used to nap on the five-hour train ride home to Wuhan from Zhuzhou in central China. Now that a fast-rail line has cut the trip to an hour and 40 minutes, he can spend more time selling information-management systems.
Before, “it took three days to get a project done”, said Zhu, 31, sales manager for Beijing Lanxum New Technology in Wuhan. “Now it’s so fast I can work out a solution for the client and be back home the same day.”
The view from Zhu’s reclining seat shows how China’s push to build a 16 000km high-speed passenger network by 2020 is carrying China’s industrial boom inland. All along the trackside earth movers and excavators clear land and begin construction. They merge into a blur as the express accelerates to 350km/h.
The country’s planned 2 trillion yuan (R2.1 trillion) in spending will give it almost as much track by 2012 as the entire rest of the world, even before the network is completed.
The new trains will transform China’s economy in the way bullet trains did in Japan in the 1960s and 1970s, said Beijing-based China International Capital, the top-ranked brokerage for China research in Asiamoney magazine’s annual survey.
“China’s high-speed rail programme is altering the landscape of consumer and property markets,” said Jing Ulrich, JPMorgan Chase’s China equities and commodities head in Hong Kong.
Rail shares
China’s bullet-train spending has buoyed rail stocks since a 4-trillion-yuan stimulus was announced in November 2008. Shares of Dalian-based China Railway Tielong Container Logistics, which provides railroad, truck and water transportation services, have risen 2.5 times since then. China Railway Erju in Chengdu, which designs and builds railways, has more than doubled.
Companies providing rolling stock and equipment to train operators have some of the best growth prospects in the country, said Anderson Chow, Hong Kong-based analyst with Macquarie Capital Securities. Overall investment in China’s railway industry will total 3.8 trillion yuan from 2011 to 2015, about 50 percent more than in the past five years, he estimates.
Earnings growth at CSR, which makes locomotives and wagons, will surge an annual average 38 percent over the next three years, said Chow. At Zhuzhou CSR Times Electric in Zhuzhou, which makes electrical systems for railways, earnings will rise an average of about 35 percent annually over the same period, he said.
The nation’s $90 billion (R622.5bn) in spending on the network last year far exceeds the $8bn President Barack Obama allocated in stimulus for US fast trains earlier this year.
The difference “is a confirmation of China’s rise and an indication of US demise”, said Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington. “We in the US are doing little to nothing and will pay a price in slower growth now and in the future.”
Japan’s bullet trains triggered “explosive growth” in tourism-related retail sales along their routes in the decade after Shinkansen services began in 1964, CICC said. Less-developed cities such as Hiroshima, Nagoya and Fukuoka “started to play catch-up in industrial production growth”. Morgan Stanley is selling its 34.3 percent stake in CICC, four people with direct knowledge of the deal said.
In China, more businesses will move inland to capitalise on labour as much as 50 percent cheaper than in the more affluent eastern areas of the country, and on lower land and rental costs. Increased rail capacity will also reduce freight bottlenecks, the bank said.
Beijing Lanxum’s Zhu said the bullet trains helped him increase sales about 15 percent this year in Zhuzhou, Hunan’s second-biggest city, because he can contact more clients.
Changsha, population six million and the capital of Hunan province, shows how fast trains are altering the landscape in central China. He Chuan Road features an array of dusty shops selling tires, noodles and groceries, typical of many provincial cities. Just around the corner towers the 200 000m2 Changsha South Railway Station, its glass curtain walls capped by a 38m-high waved roof.
The coming of the trains prompted CITIC Capital’s Stanley Ching to bet 1.5bn yuan on CITIC’s purchase of the ID Mall shopping complex in the city centre, about 30 minutes from the station. He plans to add a chain of branded retail malls over the next three to five years, mostly in second- and third-tier cities along the high-speed rail routes.
China’s industrial transformation may be greater than Japan’s, because its rail network will be bigger and its trains faster, said JP Morgan’s Ulrich. The China-made CRH380A train set a new domestic train speed record of 416.6km/h on a trial run in September, reported state-run Xinhua News.
“Places west of Shanghai can become part of China’s giant east coast export zone, and that’s already starting to happen,” said Arthur Kroeber, managing director of Beijing-based economic advisory firm Dragonomics.
China has more than 7 000km of high-speed track so far. By 2012, Beijing plans to have 42 lines in operation, covering 13 000km. Within a decade all provincial capitals and cities with more than 500 000 citizens will have high-speed links, the Ministry of Railways said. Already, the Chinese rail system is larger than any other country’s, said the Paris-based International Union of Railways.
Changsha’s fast rail link enables CITIC Capital to hire senior staff from coastal cities, such as Shenzhen, to manage retail malls, said Ching.
Travel time
When the Guangzhou-Shenzhen line opens next year, travel time to Changsha will shrink to about 2.5 hours from more than nine hours. Another line, scheduled for completion in 2014, will cut travel time between Guangzhou and Yunfu, a city of 2.6 million in Guangdong province, to 40 minutes from more than two hours.
Companies based in Yunfu, such as stainless-steel tableware maker Linkfair and agricultural company Wen’s, will benefit, said John Scales, Beijing-based transport sector co-ordinator at the World Bank. The link will help them recruit designers and research staff, according to a World Bank case study on the city to be published next year, said Scales.
China’s development of locomotives has won its companies overseas orders in Argentina, Saudi Arabia and Venezuela, and the nation is competing to build a high-speed railway in California, costing more than $40bn.
CSR and China CNR, both based in Beijing, signed overseas contracts worth a combined $2.3bn last year, according to their annual reports. The sales included switches to the US and 20 locomotives to New Zealand.
In Brazil, Beijing-based China Railway Construction and China CNR are leading a group bidding for a line that may cost as much as 33.1bn reais (R135.6bn).
The overseas expansion has brought new risks to the sector’s stocks. Shares of China Railway Construction, builder of more than half the nation’s railroads, fell the most in almost two years in October after it predicted a 4.15bn yuan loss from a Mecca, Saudi Arabia rail project.
Credit Suisse Group AG that day lowered its stock rating on the company to “underperform” from “outperform”. China Railway Construction reported a 1.36bn-yuan loss for the three months ended September on October 28, compared with a 1.45bn-yuan profit a year earlier.
Critics in China, including professors at Peking University and Beijing Jiaotong University, said the network’s high cost makes it financially unviable in a country where the average urban worker made 32 244 yuan last year, less than one-eighth of the $39 054 average wage in the US, according to data from the US and Chinese governments.
Peking University finance professor Michael Pettis called the network a “trophy”. Zhao Jian, professor of economics at Beijing Jiaotong University, said in a commentary in the China Daily newspaper in April the “blind pursuit” of high-speed rail is “highly likely to develop into a debt crisis”.
Railroads played a role in the collapse of the US corporate bond market in the late 1800s. The market had grown in prominence on Wall Street as railroad barons looked to raise cash to expand into the American West. Then came a flood of defaults, which prompted lenders to start demanding certain protections, known as covenants, written into bond contracts.
The 1870s proved to be “a disastrous decade” as default rates reached 35 percent, said a Stanford University research paper.
Russell Hoss, manager of the Newport Beach, California-based EPH China Fund, said investors in China may do better buying companies with businesses along the new lines.
“The best way to play high-speed rail is via branded consumer companies expanding in inland cities that are being linked to the east coast by the new tracks,” he said.
Raised revenue
The $90-million fund’s only rail-linked investment is Nanjing-based China High Speed Transmission Equipment Group, which raised first-half revenue from its rail power business more than sixfold to 15bn yuan.
Kroeber said construction of new track for the network will free up space on existing lines for freight, generating enough revenue over 15 years to pay for the new lines. China’s rail network is “bursting at the seams”.
Freight has doubled between Guangzhou and Wuhan since the route opened in December, said He Huawu, the railway ministry’s chief engineer. The separation of passenger and cargo lines will release seven times the capacity for container transportation, said Shanghai-based Shenyin & Wanguo Securities. - Business Report