China is keen to improve rail connections with its neighbours in order to sustain the country’s rapid export growth in Asia and increase its political influence in the region.
China has one of the largest rail networks in the world. By the end of 2000, the country’s total rail length was 68,000km, of which 12,000km was electrified. Rail may have lost ground to road and air transport in recent years – it was responsible for 37 per cent of passenger-kilometres and 31 per cent of freight tonne-kilometres in 2000, down 46 per cent and 41 per cent respectively from a decade earlier. However, the rail network is perhaps still the most important part of China’s transport infrastructure, since trains carry more freight and passengers combined than any other form of transport.
The rail network has been identified as a key area of investment. In the current 10th five-year plan (2001- 05), total investment in the rail sector will be Yn245bn, double the amount spent in the previous five-year plan. Much of this investment is being made in double tracking and electrification of the busiest routes, mainly concentrated in the eastern part of China.
Despite all the work that has been carried out in recent years, the country’s rail infrastructure is outdated and inadequate. Only three rail lines lie to the west of the three inland provincial capitals of Lanzhou, Chengdu and Kunming. A 1997 study by Mercer Management concluded that ‘China’s current railway system is comparable to that of the US at the time of the Civil War’.
China shares borders with 14 countries, among them Russia, North Korea, Mongolia, Kazakhstan, Uzbekistan, Kyrgyzstan, Vietnam, Myanmar, Laos, and India. Over the next five years, China will need to build strong rail links with these neighbours if it is to maintain its recent strong growth rates in regional trade. For example, China’s trade with Laos, Cambodia and Vietnam increased from US$27m in 1990 to US$3.3bn in 2000, partly because of the establishment of new rail links and trade routes.
China is a large exporter and importer of all kinds of manufactured goods and commodities. The most significant imports are oil and natural gas. China’s growing demand for energy has converted it from being a net exporter of oil and gas to a large importer over the past decade.
The main incentives for China to build rail links with its neighbours are:
Access to the EU market There has been a renewed interest in rail links between Asia and Europe over the past few years. Russia provides China and other Asian countries such as South Korea and Japan with potentially the most efficient way to connect to the markets of Europe. Compared with a long sea journey via the Indian Ocean, the Suez Canal and the Mediterranean, a rail link could halve the transit time and yield significant cost savings. The Trans-Siberian link is currently running at about 10 per cent of its installed capacity, so there is plenty of scope for increased loading.
Imported oil and gas China is a major importer of oil and gas from Russia and Kazakhstan, most of which is transported by rail. Russia is building large freight terminals to accommodate increasing loads to China.
Trade with Southeast Asia There is great interest in creating a China-Asean free trade bloc. China is a strong regional supporter of a rail link that will stretch from Kunming in Yunnan province to Singapore via Vietnam, Laos, Burma, Thailand and Malaysia. Asean governments enthusiastically support this project and have started building tracks in each country to connect key cities along the route. Much of the Kunming-Singapore route already exists – out of the entire 5,450km route, only 843km needs to be built. The link is expected to be functional by 2006.
Political influence China is positioning itself to eclipse Japan as the major power in Asia. These rail projects give China a chance to fund and influence the development of many small countries in central and southeast Asia, and to be seen as a strong partner.
Transit revenue Shipments from South Korea or Japan to Europe will pass through China and provide a stream of earnings. There are several issues that need to be addressed to make these links work:
Political commitment Regional governments need to make sure that these projects are adequately resourced. For example, Russia’s president Vladimir Putin has made the Trans-Siberian railway one of his top priorities and he has been pushing for better operating efficiencies and loading. Countries that need to make similar commitments are North Korea, Myanmar and the smaller central European and Asian countries.
Efficient border crossings Efforts are being made to ease customs formalities and simplify the tariffs regime. This will help to reduce logistics expenses, which are a big concern for exporters. However, much remains to be done. In September 2001, China and Russia signed an agreement that aims to raise the capacity of border crossings. Two months later, South Korea, Russia, Mongolia and Kazakhstan pledged to start work on reducing obstacles at border crossings and implement a trial run on the northern route of the trans-Asian railway. China, Poland and Belarus will also be joining the MOU in future.
Rail gauge Many of the countries trying to connect to each other have different rail track widths, or gauges. Russia has a unique 1.5-metre gauge, which means that all shipments into and out of the country have to be moved to other railcars before they can proceed. Russia is strongly supporting extending rail lines of Russian gauge into Poland and the Czech Republic, but its troubled historical relationship with these countries means that the process is not easy.
Security Many of these rail routes go along wild, uncharted country. Security of shipments is a key concern. Safety can be enhanced by containerisation, but additional measures are required. For example, every train on the trans-Siberian railway has an armed escort.
Communications Over long rail routes, it is crucial to have dedicated and highly reliable communication links based on wireless or ‘twoway radio’ technologies. Over most of the routes there is limited fixedline or cellular telephony coverage, and therefore private networks are the only viable option. Wireless links can be put up in the shortest possible time, and over difficult terrain as well. Given the number of countries connecting to the network, a single digital communications standard will have to be adopted across the network.
China’s railway ministry is mak- proing rapid changes to the way it is organised and how it operates. For example, it recently announced that foreign companies would be allowed to invest in the Chinese freight sector.
Foreigners were actually the first to bring railroads to China, when they built a 14km stretch from Shanghai to the Yangtze River in the 1800s. Later, France, Germany, Russia and Japan provided lots of additional funding and investment.
Today, funding rail expansion within the country is not the biggest problem facing China. The most important source of capital is a railway construction fund that levies a ‘tax’ of Yn0.033 for every ton/km of goods transported. This fund is estimated to raise at least 85 per cent of the funding required for all rail construction.
Over the past year, the Ministry of Railways has also become active in issuing bonds to fund rail projects. In December 2001, US$180m-worth of 15-year bonds backed by China International Trust and Investment Corporation were issued to fund the Baoji- Lanzhou and Xian-Nanjing lines.
In addition, international development banks and multilateral funding agencies such as the Asian Development Bank and the World Bank have made loans to fund rail projects in China and neighbouring countries. Funding has also come from Japan and Ger- many, much of it tied to the use of Japanese or German equipment. The Japanese government claims that it has funded 35 per cent of China’s electrified railway track. Cumulative overseas funding in China’s rail projects is estimated to exceed US$6bn, according to the Ministry of Railways.
Elsewhere in Asia, China has played an active role in either funding rail projects, as in Kazakhstan, or by providing construction services, as in Malaysia where it has agreed to a counter-trade deal in exchange for palm oil. Chinese and Indian rail construction companies were awarded contracts for constructing the north-south line in Malaysia that will form part of the Kunming-Singapore rail link. Indonesia has also approached China for similar counter-trade deals.
The break-up of the former Soviet Union led to a drying up of funds for railways in central and south Asia. China has stepped into the breach by providing funding to build up the networks of many smaller countries in this region.
The private sector will have to play a crucial role in funding rail projects in the region. Multinational corporations such as General Electric are interested in entering the freight business in China. However, investors will keep in mind the disaster during the late 1800s and early 1900s when many rail proing jects in China and Russia went bankrupt. The ornate rail bonds that were issued at the time can now be bought in antique markets.
The Ministry of Railways is one of the most traditional and old-fashioned ministries in China. It has been slow to change, is tightly centrally controlled and almost para-military in its organisation. However, there is a clear realisation that the only way forward is for the ministry to take on a leadership role in building rail links with China’s neighbours.
Connecting such long, complex rail networks is not an easy task. But if China wants to capitalise on its entry into the World Trade Organisation, and boost its trade with the rest of the world, these rail links are going to be important. Investment in building up the internal rail networks in China as well as the links with neighbours will continue for the foreseeable future.
This article was written by Ashis Bhattacharya. He is the director, strategy and marketing, Asia-Pacific of the commercial, government and industrial solutions sector of Motorola Electronics. Motorola provides integrated communications solutions to industry, and is a world leader in providing communications for rail and metro rail. Website: http://www.motorola.com/cgiss/AP E-mail: ashis.bhattacharya@motorola.com