China HSR. Should We Follow Their Lead?

The Pros and Cons. The Pros and Cons of the burgeoning Chinese HSR system are discussed in this article by Bloomberg News dated December 3, 2010. Bouyed by Government spending, cheap labor, and lax environmental laws, the new rail systems have produced job growth for some and as long as they are pouring concrete there is good opportunity for investment in Rail. Only time will tell if the benefits to Chinese society outpace the capital costs ($300B), the debt service and maintenance of such a vast (16K km/10K mi) HSR system. The article points out that, long term, the better investment will likely be in businesses along the rail route, rather than in the HSR building industry. In the US, it has been freight and not passenger rail that has proved profitable over the long run. Is it possible to reverse the trend with higher speed trains based on a more flexible fuel source? (The question is important for Californians because the bond measure stipulates that there can be no operating susbsidy.) Some think so, but this author has his doubts. At best, it is an extremely risky use of taxpayer money, as few systems in the world have proven to be profitable. Their incremental benefits to the economy as a whole are hard, if not impossible, to measure.

A cautionary tale to China is pointed out in the above article, "Railroads played a role in the collapse of the U.S. 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, according to a Stanford University research paper."

If America decides to build a new HSR network, could we be risking a repeat collapse of the bond market? Consider that California ran a $19B deficit in 2009 and is looking at a $25.4B budget deficit thru June 2010's. This is with minimal HSR spending. The California bond rating has already been degraded from AAA down to A- (the lowest in the country along with Illinois), and our percentage of debt-to-GDP continues to grow. Debt servicing from July 1, 2010 to June 31, 2011 is expected to consume 7.71% of the $86.6B General Fund, up from 6.69% the year before. The United States as a whole is running a debt-to-GDP ratio of 84% and a deficit-to-GDP of almost 11%, which may explain why it is so hard for Washington to find federal funding for state HSR projects.

For more California Budget information, see the following: CA Dept. of Finance site here, the State Controllers office here, and Sunshine Review. To view in graph form see usgovernmentspending.com.

Should China Rethink HSR? In the first openly critical report, the Chinese Academy of Sciences (CAS) urged the State Council to re-evaluate the large-scale HSR construction projects in China. According to articles such as this one, "The CAS worries that China may not be able to afford such a large-scale construction of high-speed rail, and such a large scale high-speed rail network may not be practical." "The report submitted by the Chinese Academy of Sciences said China's high-speed rail construction has caused debt that has already reached unsustainable levels."

China's Quality Issues. In this article, the quality of coal ash being used in the making of the concrete HSR beds is called into question and may prove a costly maintenance issue sooner rather than later for China.

China's HSR Displacing Low Cost Alternatives. This Jan 13, 2011 article titled "Bullet train rides in China pinch travellers" seems to back the notion some have that HSR is a luxury for the rich.

"... the opening of more fast train [HSR] services has led to fewer regular trains being available, leading to the displeasure of the budget-conscious passengers, China Daily reported.

Many travelers who used to take the regular trains [over HSR] because of the cheaper fares have opted for long-distance buses this year, which will put extra pressure on road transport, said transport ministry spokesman He Jianzhong."

February 18, 2011. Article: Will Massive Debt Derail China’s High Speed Train Plans? The paper quoted Zhao Jian, a researcher at Beijing Jiaotong University, as saying that “the debt had at least reached 2 trillion yuan by now, and the interests of those debts have grown too large for the government to afford.”

Corruption! In this same article Liu Zhijun is listed as just the first big name to fall in the ongoing corruption probe of China's lucrative railways industry, said analysts and the local media. This is the same man who met with Governor Schwarzenegger and Rod Diridon in January 2011. Diridon said, "you are able to build this system rapidly, you have good experience, you would be a formidable bidder." The Chinese press is reporting that rail magnate Ding Shumiao is also under investigation, with business magazine Caixin citing unnamed sources that the case 'may involve something much bigger'.

Fatal Crash. Lightening strikes on Chinese high speed trains seem to be an ongoing problem causing power outages resulting in incapacitated trains, and now a Fatal Crash when the control system lost power, too. Death toll as of this writing at 43, injured at 210.

Japan. Buyer beware. One must remember, similar to how we feel about China now, in the late 1970's/early 1980's many Americans were concerned that Japan owned too much of America and that we should be investing like they were, only to watch their economy collapse.