Railway boom to boost industries

A construction worker bolts together high-speed rail track in Urumqi in the Xinjiang Uygur autonomous region. [Photo/China Daily]

Investment will increase demand for steel, absorb overcapacity

China's railway construction boom will help boost the struggling steel, cement, glass and other heavy industries to put the country's economic growth on a firmer footing in the second half of this year.

Earlier economic indicators suggested that China's 2014 first-half growth had slipped below the annual target of 7.5 percent, which pushed the government to take more decisive measures to manage a healthy growth pace.

China Railway Corp, the country's railway operator, raised the 2014 railway fixed assets investment budget from 720 billion yuan ($116.47 billion) to 800 billion yuan in May, a clear attempt to kick-start its slowing economy. The investment will be used in the construction of 48 new railway projects in the second half of this year.

Zhao Jian, a professor of railway development at Beijing Jiaotong University, said accelerating railway construction will certainly help China increase the effective demand for steel, cement and other heavy industries, while absorbing overcapacity.

The country produced 411.91 million metric tons of crude steel in the first half of 2014, or 3 percent higher than a year ago. In the meantime, pig iron output grew 0.5 percent year-on-year to 362.02 million metric tons, while rolled steel production increased 6.4 percent to reach 552.25 million metric tons.

However, data from the China Iron and Steel Association show the steel industry has excess capacity between 180 million metric tons and 240 million metric tons. Chinese steelmakers have incurred huge losses.

China aims to extend the total length of track being constructed to more than 7,000 kilometers this year, up 25 percent from the actual construction completed in 2013.

"In comparison with other economic stimulus packages, railway construction investment is a practical way of supporting the job market and has an immediate effect to support the country's growth," said Zhao. "It will also push forward urbanization and reduce regional inequality."

Wang Mengshu, an academic at the Chinese Academy of Engineering, said the new round of expansion should cover every provincial capital in the country, bringing with it vast economic benefits, especially in western China.

China has 100,000 km of railway, to serve a population of 1.37 billion; yet the United States has 272,000 km of track for a population of 300 million people.

"The expansion of various railways, including high-speed, freight rail and more intercity services, can bring so much more than just convenience. It has the ability to change people's lives and the country's trade structure, and as a result I foresee much better dispersal of the population," Wang said.

To gain sufficient funds for these new rail projects, the central government in July unveiled a guideline on management of a fledgling railway development fund to attract private investment into the railway sector.

The China Railway Development Fund managed by the CRC will last for 15 to 20 years and could be extended if approved by the State Council. The CRC will sign agreements with private investors and propose the amount of annual fundraising.

The fund will be prevented from being invested in high-risk investments such as guarantees, futures or derivative financial products.

He Jingtong, professor of finance at the Tianjin-based Nankai University, said even though it is a flexible improvement to raise funds from the public, the CRC's debt is too high and it still has administrative and monopoly operation power. Therefore, it won't be easy for investors to buy the new railway bond or stocks within a short period.