in depth
067
china’s great
railway awakening
It wants to lay 75,000 miles of
By Chi-Chu Tschang
Beijing
Two or three times a year,
Cargill’s joint-venture fertilizer
plant in China’s remote Yunnan province
has to shut down, usually for weeks at
a stretch. That’s when there aren’t any
railcars available for shipping its fertilizer
to customers across China. Without
railcars, the factory’s warehouse fills to
overflowing, and production has to halt.
“There’s a huge demand for shipping,
but the railroads can only meet 30% of
the demand,” says Zhang Hong, sales
manager of the plant, which shut down
yet again in October.
For decades, China has neglected in-
vestment in railroads in favor of build-
ing highways. With less than 49,000
miles of rails, China has roughly a third
of America’s track for an area of simi-
lar size. The nation’s rails carry a quar-
Jianan Yu/Reuters
ter of global train cargo and passenger
traffic on only 6% of the world’s track,
making its system the busiest on the
Nanjing to Hefei:
Laborers install
track for a
high-speed line
track. Will investors get on board? in the red. In June, China’s first
planet. “China’s strained railroads have
already become a bottleneck for the
economy,” says Yu Tengqun, secretary of
the board of state-owned China Railway
Group, which has built two-thirds of
China’s railroad network since 1949.
crisscrossing the map
China is now undertaking the world’s
biggest railway expansion since the
U.S. laid its transcontinental line in the
1860s. Beijing plans to spend $248 bil-
lion through 2020 on 75,000 miles of
new track, for both freight and high-
speed passenger lines. At that point,
China’s high-speed passenger network
will be the biggest on earth.
china squeezes a quarter of the world’s
train traffic onto 6% of its rails, yet many
mainland rail companies are losing money
Despite these colossal
ambitions, a nagging question
remains: Can anyone make
money from this ramp­up? Equip-
ment suppliers, such as China
South Locomotive & Rolling
Stock Corp. and multinationals
like Siemens, certainly can. But
it’s hard to profit from actually
running a railroad on the main-
land. Analysts at UBS estimate
China’s Ministry of Railways,
which operates the railroads,
has a net profit margin of less
than one percent on revenues of
about $35 billion. The Ministry
maintains majority control over
all rail lines and sets both freight
rates for farm products and tick-
et prices for migrant workers at
artificially low levels. It wouldn’t
comment for this article.
That pricing policy is politically
smart but commercially ruinous.
Only 16 of China’s 26 joint-ven-
ture railway companies—each of
which involve the Ministry—are
marginally profitable, according
to UBS. The rest chug along
private enterprise to invest in a
railway project, Guangyu Group, decided
to reduce its stake in the Quchang Rail-
way to 19%, from 34%. The company
was unwilling to comment.
Pressure on the Ministry of Railways
to find the billions needed for all this
expansion may eventually force it to
loosen its grip on pricing and cede
control of at least some of the railroads.
“There is a lot of capital now that is very
interested in building railroads,” says
Zhao Jian, a professor at Beijing Jiao-
tong University who researches railway
reforms. Until that happens, China’s rail
industry will continue to attract more
business than it can handle and fewer
investors than it needs.
NOVE M B E R 3, 2008 I BUSINESSWEEK