[By Liu Rui/Global Times]
A wave of doubt and criticism of China's ambitious high-speed railway plans have surfaced lately.
Last week, the Global Times published an article by Ye Tan, a financial commentator, "Transportation boom set for financial bust," that essentially points to two arguments challenging the strategic plan of Ministry of Railway (MOR).
Ye argues that high-speed railway is too fast, too costly, way ahead of its time and not sustainable over the long run. She also claims that the debt ratio at the MOR is so high that in the next two to three years it is likely to run into insolvency in servicing its debt.
Let me first address the second argument, which is easier refute. The MOR's debt-to-asset ratio right now stands at a bit over 50 percent. Although it has steadily climbed higher over the years, this level of debt ratio is well within the safety margins compared to many other providers of public infrastructures of such large scale.
Financial analysts who make a living following companies like Microsoft and Google are destined to be disappointed with public transportation companies, where earnings are mediocre, debt-to-asset ratios are high, and investment payoffs take a long time to materialize.
Just look at China's three largest airlines, Air China, China Southern Airlines, and China Eastern Airlines. Their debt-to-asset ratios are all around 90 percent, and yet they are still solid companies delivering decent earnings year after year.
The MOR's net profit margin has been around 10 percent for the last three years. And I do have a complaint about that - it's too much. There is no reason for a State monopoly to reap in such high profits. The MOR should lower its fares to benefit the public.
The MOR is a cash cow, being the only player in town in the railway business. The prospect of it running into insolvency is total nonsense. In the worst case, even when the MOR has a short-term cash flow problem, the Chinese government won't stand by and watch it go down.
Public transportation has many other economic benefits that financial analysts usually don't understand, including facilitating inter-province trade of goods and services, regional economic integrations, and stimulus functions to create jobs and economic activities.
The overall economic impact can't be seen just from cranking out ratios from the MOR's balance sheets and income statements. Therefore it is not unusual for the State to subsidize such public transportation rollouts.
When it comes to constructing high-speed rail, no country so far has relied entirely on the private capital markets. The Obama administration has already allocated billions of federal money for high-speed railway development in the last two years.
This leads to the issue of whether China's high-speed railway projects are ahead of its time and have become too expensive for the public to bear. Some analysts have used the mediocre financial performance of the Beijing-Tianjin line as a basis for asserting the lack of demand for such high-speed service.
Speed is indeed costly. High-speed railway tends to have a sweet spot of operation in terms of traveling distance - usually between 200 kilometers to 1,000 kilometers. Even though the Beijing-Tianjin line falls short of this range, it has still earned a positive cash flow within two years of opening service, with an occupancy rate above 70 percent.
The Shanghai-Nanjing line's occupancy rate is even above 100 percent, meaning there's more demand than seats available. Judging from these encouraging statistics, one has every reason to believe that newly opened high-speed railway lines will continue to deliver solid ridership statistics.
It is understandable that some citizens with lower incomes will lament the disappearance of slow but cheap green trains and minority is vocal about it. The silent majority, however, are already voting with their wallets.
The author is an associate professor of the Beijing-based University of International Business and Economics. johngong@gmail.com
