Delays expected

New highway out of Shanghai on track: some new railways less so

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28 Oct 2011
Week in China

The status of Chongming Island can prompt misunderstanding. Foreign observers might think it China's second largest island, after Hainan. That would be almost unforgivable for Chinese nationals. Include Taiwan in the rankings, and Chongming takes third place.

Falling under the governance of the sprawling Shanghai municipality, Chongming was traditionally a hard place to reach, with a ferry trip the only option. So the opening of both a bridge and tunnel a few years ago, connecting the island to the Shanghai mainland, was a massive improvement.

Now Chongming is set to become even more accessible, with a new highway linking the island to neighbouring Jiangsu province due to open by the end of the year. Once complete, the 52km road will cut the drive from the centre of Shanghai to Jiangsu from three and a half hours to just 90 minutes.

This is a suggestive stat: it demonstrates China is still a country that can build transformational infrastructure – in this case improving links between two of China's wealthiest regions, cutting journey times by two hours.

But the case for other projects has not always been clear cut, especially in the railway sector, where the NDRC has already approved expensive railway projects between a number of developing cities. New routes such as Shijiazhuang to Wuhan or Chongqing to Lanzhou don't have the obvious economic appeal of the Chongming highway.

China is still a country that can build transformational infrastructure – in this case improving links between two of China's wealthiest regions.

Suddenly, returns on investment are coming in for a lot more scrutiny. And that means that the debate may also focus on whether some of the proposed railways will even get finished.

An estimated 10,000km of railway projects are currently suspended or postponed. That's the news from CBN, citing information from an engineer at China Railway Tunnel Group. If it is accurate, it would mean that work is still continuing on 10% of new lines. A survey conducted by a railway website in August put the number of suspended projects at 30% of the total – still enough to show that there is something seriously wrong.

The main difficulty for the industry at the moment is funding, with every participant in the railway sector suffering capital shortages. Money from central government, in the form of loans or direct investment, has dried up this year. And the Ministry of Railways, which already has a Rmb2 trillion debt burden, is finding it increasingly difficult to borrow more.

This is leading to cash flow problems for many of the companies building the lines. In the first half of the year, China Railway Group spent Rmb17 billion more than it received. China Railway Construction also reported negative cash flow, at Rmb12.6 billion. As the money runs out, construction stops.

This has a broader economic effect. Firms supplying the railway companies are not being paid. "China Railway Group has no money, so we stopped supplying them. But that makes our business worse," a steel producer told CBN.

Then there are the estimated six million workers building the lines. Many are owed wages by their employers – more than 2,000 petitions have been filed with China Railway Group since July.

The Ministry of Railways is borrowing as much as it can to keep things moving, mostly through the bond market. So far this year, it has issued Rmb160 billion in new debt, with the latest Rmb20 billion tranche raised earlier this month.

In the prospectus for the latest bond, the Ministry said it would be spending Rmb2 billion of the proceeds on the Shijiazhuang to Wuhan line. That looks like small change compared to the investment of Rmb114.7 billion initially planned for the project.

But if the Ministry is now struggling to get finance for these new projects, building work looks like being put on hold. Those waiting for a new train to arrive at their home town can expect delays for sometime to come too.

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