China's railways appear to be putting behind them the disappointments of recent years. Ac-cording to news reports, the number of passengers in June 1997 was 25 per cent higher than in June 1996 ?reversing a two-year trend of losses to road and air. And though freight volume was down in the first five months of this year, in common with road and water, the ministry of railways said it had surpassed targets for several key categories. More important, the ministry claimed to have made a profit in the first half of this year, ending a run of losses that started earlier this decade:
In August Premier Li Peng made a statement on the government's transport strategy. He defined railways as the backbone of the system, roads as the foundation and water and aviation in a supportive role. Li went on to define rail as best for medium- to long-haul traffic and road for short-haul. To achieve this, he called for closure of under-used stations and.adjustment of railway fares and charges. Li confirmed that the network would be extended to a total length of 68,000km by the year 2000, as stated in the Ninth Five-Year Plan (1996-2000).
The statement contained no surprises. Transfer of some traffic to road and closing under-used stations intensifies policies adopted in the 1980s when the slogan 'make road substitute for rail' was the response to a crisis in freight trans-
port. However, Li's categorisation of rail and road did mark a change in official rhetoric. From the mid 1980s onwards, rail was conventionally called the most important mode of transport in China. In successive five-year plans rail attracted more central government investment than any other form of transport. The new formula makes road different but equal and may signal a future shift in priorities and resources.
Rise of road and air traffic
When the pace of economic development increased in the 1980s, the railways were unable to respond to the greater demands for transport. The rate of growth in rail transport was less than both the rate of growth in the economy and of its rivals road, air, and ?for freight ?water. Since 1980 China has averaged annual rates of economic growth close to 10 per cent. The average annual rates of growth in transport of freight and passengers by rail between 1980 and 1996 have been 5.1 per cent and 6.3 per cent, while those for all other modes combined have been 9.2 per cent and 13.6 per cent.
Since 1979, the railways have been seen as an impediment to overall economic development. Factories and mines dependent on rail have been forced to limit production or to stockpile output that could not be moved to customers. In 1993 China's principal coal mining province of Shanxi stockpiled70m tonnes of coal which had been brought to the surface but could not be transported. Lack of fuel held back electricity generation, which in turn held back economic growth. Phosphate production in south-west China is regularly held back to the amount that can be trans-ported, while agriculture suffers from lack of phosphate fertilisers. The Economist Intelligence Unit estimated that economic losses resulting from lack of rail transport totalled Yn500bn (US$60bn) in 1994.
The railways also fail to provide a high quality service. The Chinese press have reported cases where local railway officials took advantage of the shortage of rail freight capacity to demand bribes from shippers. Newspapers have also run campaigns against the high level of damage and loss suffered by freight in transit. In the passenger market, over-crowding is notorious as trains on the most popular lines carry up to twice as many passengers as seats available.
Traffic has been shifting from rail to-wards faster and more convenient alter-natives. The minority of stations recording increases in freight and passengers handled were those benefiting from new rail developments. But the general picture is of decline, with many stations in the old industrial areas suffering badly.
Freight traffic by rail
In spite of competition from other modes of transport, the railways remain the principal mode of transport for long-distance haulage of freight. Transits take longer, but rail remains significantly cheaper than road and air. This may change when the network of modern highways ?now in the first stages of development — takes shape during the early decades of the next century, with an objective of 35,000km of trunk high-ways by 2020. Even then, transport of coal ?40 per cent of rail freight traffic in 1995 ?and other bulk products such as minerals and grain, will be dominated by rail.
To improve freight performance, the railways need to increase capacity. One way to do this is to increase the weight of trains. At present the maximum permitted axle loading is 20.5 tonnes, compared with the US's 30 tonnes, and the objective is to increase this to 25 tonnes. Also, more powerful locomotives will be required to pull heavier trains. China has its own manufacturing industry which supplies both diesel and electric locomotives but its most powerful locomotives were imported in the 1980s and early 1990s.
The railways are also trying to build up new markets, such as containers. China's railways have their own system of containers and were slow to develop services for international containers when they came into China in the 1980s. As a result, most are sent by road ?in 1993 only 110,000 TEUs of containers were carried by rail, when Chinese ports had a total throughput of 2.5m TEUs. Starting with a Xingang-Wuhan service in 1995, the railways are developing a network of special container trains linking ports and inland cities. This year Shanghai-Chengdu and Dalian-Harbin services started.
Railway management's response to road and air competition is to develop faster, more comfortable trains by combining special .high-speed railways and ex-presses on the main network. Reductions in local services are balanced by increases in long-distance services which attract higher load factors. Faster 'direct ex-presses' are running between the largest cities and special 'tourist trains' operate on selected short routes. Rolling stock on these services is air-conditioned and gives a higher standard of comfort for which passengers pay premium fares. Management is also hoping to make it easier to buy train tickets by developing a computerised reservation system.
At present passenger trains travel at a maximum of 90km an hour. The objective is to increase this to 120km an hour on ordinary track, but the density of traffic on China's main lines can only be maintained by keeping speeds relatively low. Improvements in trains, track and signalling will enable faster travel, but it will be an expensive and drawn-out process. China also has plans for new high-speed or express railways between major cities. The 'pre-express rail-way', built to run trains at 140km an hour between Guangzhou and Shenzhen proved a success, and China is now going ahead with a new 1,310km line between Beijing and Shanghai with a maxi-mum speed of 250km an hour. A first trial section, 160km from Shanghai to Changzhou in Jiangsu province, is currently being built.
The cost of building this line is very high?in 1995 the trial section was estimated to cost US$964m and the total project up to US$10bn. No decision has been announced on using foreign private capital. However, China will need to import equipment, and the French TGV and the Japanese bullet train will be among the main contenders. At the moment, Japan seems to be making the running.
Revenue from passengers grew between 1985 and 1995 twice as fast as revenue from freight and the attention paid by the railway authorities to passenger traffic is understandable. Nevertheless some experts believe that the railway authorities in China risk concentrating too much on passengers. "Most passengers lost to airlines won't come back," says Ms Hennie Deboeck, a World Bank financial analyst specialising in east Asia. "The rail-ways should make sure they don't over-invest in passenger transport."
Increases in train weight and speed will involve significant costs as rails, trackbeds and civil engineering structures will need to be strengthened. In addition, higher speeds will require the conversion of semi-automatic signals into fully-automatic. This upgrading will be in addition to the work of electrification and double-tracking (see table). China still has far less railway for its area or population than, say, India or the US, and the government is continuing to plan extensions of the system.
The proposals for the current five-year period are more ambitious than in the previous plan. The objectives stated at the beginning of the period were new lines for coal transport and, after the new Beijing-Kowloon route, expansion in the south-west and north-west. This summer the government announced a pro-gramme costing Yn200m for railways in the west of China. This appears to re-turn to the priorities of the pre-reform period when many lines were built in western mountain and desert areas. In the 1980s, Chinese experts said that these lines were uneconomic because of low volumes of freight traffic.
All these investment plans will cost more than the government can afford. The Eighth Five-Year Plan programme was scaled back after its commencement because the government failed to find the necessary money. The plan called for
work costing Yn30.7bn in 1995, but the government could raise only Yn24.7bn, so resources were concentrated on key projects such as the Beijing-Kowloon line. Expansions to the system tend to be most attractive politically. "The World Bank believes that more could be done on upgrading capacity (of the existing system)," says Ms Deboeck. "It's a relatively cheaper approach."
Sharing the burden
The government has stated that main line development will remain its responsibility. To fund construction, the state has used loans from international agencies including Japan's Overseas Economic Co-operation Fund, the World Bank and the Asian Development Bank. Loans continue to be made ?the ADB earlier this year agreed to make a loan towards constructing a new line in the west of the country, as part of a programme of 16 new projects to help open up that area. By March 1996, the World Bank had made loans totalling US$2.3bn for Chinese railway projects. However its policy has shifted from the 'physical in-vestments' of its first loans to supporting 'policy components' such as costing and financial models to help China make market-based investment decisions.
The bulk of the funds come from internal sources. Ordinary operating revenue has not generated funds for major capital investment. By 1993/94 a record operating surplus of 1990 had turned into a deficit. The first response was to in-crease fares and freight charges which had been pegged at low levels for political reasons. Expert analysts argued ?before the increases ?that the absence of effective competition for much of the railway's freight traffic meant that rates for carriage could be much higher. The existence of a black market indicates that the passenger market can bear higher prices on popular routes. Last autumn, tickets for the Shenzhen-Beijing service could only be obtained from touts at a premium price. For freight, a national inspection to uncover overcharging by local officials was carried out over the summer and will be completed this month.
The railways are also controlling costs. This summer, the government announced that 300,000 jobs ?around one-tenth of the workforce ?had al-ready been axed, and 60,000 a year are planned to go until the end of the century. In addition, 152 stations have been closed, 68 stations reorganised and over 1,000 offices closed. However, profit in Chinese terms only means an operating surplus, and would not include a return on the bulk of the capital investment. By international accounting standards, much of the main railway system is still unprofitable.
The railway's own contribution to major capital expenditure is the Railway
Construction Fund built up by a surcharge on freight carried by the railways. This is estimated to stand at over Yn30bn, but development is effectively dependent on government allocations which are given as loans through the China State Development Bank, an organisation under the State Council. This year the bank will make loans totalling Yn11.7bn for railway development.
Funding from provincial or even local governments has been important since the 1980s. The Northern Xinjiang line from Urumqi to Kazakhstan was established as a separate company jointly owned by the national Ministry of Rail-ways and the provincial government. Local funding is even important for lines that remain directly under national ad-ministration. For example, contributions by local governments towards the building of the Beijing-Kowloon line were re-paid in the form of transport capacity on the line.
Search for private capital However, local government funding policy varies considerably. Shandong provincial government is not recorded as supporting any railway project and Jiangsu province, before the Beijing-Shanghai high-speed line, had supported the building of just one 50km line. Both provinces have been part of a 1990s trend of investing heavily in modern road schemes.
The central government is also looking for ways to involve private capital. Local bonds issued to Chinese investors have raised the equivalent of over US$200m. Beijing also wants to attract equity capital. Direct participation in ownership by foreign private capital is welcomed for new branch lines, and the Chinese authorities frequently publish proposals inviting participation in new schemes. This summer invitations were published for three lines, one of which was for the high-speed line between Guangzhou and Zhuhai. However, investors have shown less interest in railways than roads or airlines, because initial costs are higher and returns are slower. So far only one line has been built with foreign private capital ?a 250km line between Jinhua and Wenzhou in Fujian province expected to open early next year. This is a joint venture, 25 per cent owned by Hong Kong's Lin Ying Co., 30 per cent by the Ministry of Railways and 45 per cent by the provincial government.
Railways built as joint ventures, either with foreign participation or between Chinese partners, can negotiate premium fares and charges calculated from national base rates. They can also engage in ancillary activities such as property development. One of the most successful of the Chinese joint ventures ?between central and provincial government ?is the 320km Sanmao line in Guangdong province which is a possible candidate for B-share listing. Its prof-its come mostly from its subsidiary activities which include tourism and real estate. Yet even these incentives have attracted only small amounts of private capital into railways.
The Ministry of Railways is also considering creating independent companies out of the territorial divisions or bureaux of its existing network as part of its strategy for raising capital. Its equipment manufacturing industry, organised into the China National Railway Locomotive and Rolling Stock Industry Corporation, has been given greater autonomy, including the ability to set its own prices as part of its 'corporatisation' process. The newly independent corporation has begun to win export orders (see box). The need for technical upgrading opens the possibility of joint ventures in manufacturing and build-operate-transfer ventures for technology transfer.
For railway lines, possible corporatisation schemes are the Datong-Qinhuangdao line, a modern line carrying coal from Shanxi, and bureaux in Foreign forays Chinese railway equipment manufacturers are using their independence to enter the international market. The Zhuzhou Electrical Engine Plant provided 12 locomotives for a Tehran suburban railway in 1996. This year, the Changchun Passenger Train Plant, which built the rolling stock of Beijing's underground railway, is sup-plying 54 double-decker tramcars for Tehran's transport system. In Africa again, the Chinese Civil Engineering Corp. has won a contract to renovate the Nigerian railway network. As part of the contract, the Sifang Rolling Stock Plant of Qingdao, Shandong province, is supplying 70 passenger coaches to Nigeria. China is even ex-porting to the US — China Locomotive Industrial Corp. has agreed with Bogie Truck International of the US to supply components for bogies.
Dalian, Nanning and Fuzhou. So far, the only part of the existing network that has been hived off is the 147km Guangzhou-Shenzhen line which provides a premium service between the two cities. It was able to raise the capital to build a new high-speed line alongside the old one. Although technically independent, its rates and fares were held to 150 per cent of the rates on the main network, and its timetabling and train make-up had to comply with Ministry of Rail-ways' requirements. In April 1996, in preparation for flotation in Hong Kong, the company acquired a greater degree of autonomy to set its own charges and schedules. Earlier this year the management of the line was suspended for illegal speculation on the stock market. This may cause policy makers in Beijing to slow down privatisation but, whatever the outcome, foreign capital will not be allowed to go into main lines.
With improved services, the railways have the potential to retain and even enhance their strategic role in China's trans-port system. But this will require more capital than the government will be able to find. They must, therefore, look to the only source not yet fully utilised ?private capital, particularly foreign capital. At present, investors are not attracted to railway schemes, but means need to be found to bring them in, if the railways are to remain the backbone of China's transport.