From Forbes’ Gordon Chang, (bold emphasis mine)
Last week, the powerful National Development and Reform Commission saved the country’s Ministry of Railways from default by announcing that the bonds of the troubled agency have “government support.” The announcement followed a decision earlier this month to cut taxes on interest paid on railway bonds. Moreover, the Railways Ministry reached agreement with the central government to force state banks to support its nationwide building program. Reports indicated that some of these financial institutions had previously cut their quota of loans to the debt-ridden ministry.
The series of steps saved the country’s railroad-building program, which had been floundering. Due to a cash crunch, contractors had stopped payments to cement and steel companies, migrant workers had not received wages for months, and projects to build thousands of kilometers of track had been put on hold.
Beijing in 2008 embarked on a gargantuan program, the world’s largest high-speed rail network. By the end of last year, the Railways Ministry had overseen the construction of 8,358 kilometers of high-speed rail track. It is building lines totaling a little more than 10,000 kilometers.
The centerpiece of the program is, by itself, the most expensive civil engineering project in history, the Beijing-Shanghai line, costing an estimated 221 billion yuan, about $34.6 billion. That overtakes the second-place Three Gorges Dam, which cost a mere 203.9 billion yuan. The line connecting the two cities is 1,318 kilometers, including 16 kilometers of tunnels. The service opened this July, about a year ahead of schedule.
The high-speed train cuts travel time between the two cities from 10 hours to less than five—when it is running. A series of power outages have plagued the showcase project since it began operating. Yet the repeated service interruptions are not nearly as bad as the collision in Wenzhou on July 23 on another line. The two-train accident, according to official statistics, killed 40 people and injured 177…
Zhao, perhaps China’s foremost critic of the high-speed rail system, points out that the low usage has created a debt crisis. The Beijing Jiaotong professor argues that if the Railways Ministry goes ahead and spends 4 trillion yuan as planned, it “will have absolutely no ability to repay.” Even now, the agency is having difficulty meeting its obligations. It has issued a series of bonds this year, in part to pay off maturing obligations and partly to pay suppliers.
The financial difficulties of the Railways Ministry have begun to affect state enterprises, such as China CNR Corporation, a train maker. CNR is now issuing bonds to meet its obligations to repay short-term debt. It has short-term debt because its accounts receivable skyrocketed due to “delayed payments” by the Ministry of Railways. As a result of mounting debt, CNR’s stock is among the worst performers in Asia. And the markets have also punished the shares of its competitor, CSR Corporation, the other state train maker.
The Railways Ministry is expected to issue 100 billion yuan of bonds this year, but some analysts think the agency has severely underestimated its cash needs. The ministry says it needs to raise 45.5 billion yuan for fixed assets this year when others think the actual figure is closer to 1.05 trillion yuan.
In any event, MOR, as the Railways Ministry is known, now has 2.1 trillion yuan of debt. Before the NDRC’s vague announcement of support last week, analysts were quietly talking about the ministry’s default. A bailout, perhaps in the form of the Ministry of Finance assuming the railway debt, is still necessary. The rescue effort will be costly: the Railways Ministry’s obligations are more than 5% of China’s GDP.
Beijing has the financial resources to save the ministry, but unfortunately it is not the only debtor that can use a hand. Chinese officials decreed the construction of most of the infrastructure built in the last three years because they wanted to create GDP. Now, however, they are busy thinking about how they will pay for all the “ghost cities” and train tracks to nowhere they have just built for this purpose.
In China, broadening signs of bailouts have not been signs of stabilization. Instead, the whack a mole or piecemeal approach signify as indications of a broadening deterioration of her economy. As I earlier said, expect more bailouts to come.
Importantly, these are risks that can't be ignored.
