Chinese Officials Say Railway Ministry's Debt Ratio Under Control

China's fast expansion of high-speed rails has come under increasing scrutiny over concerns that large-scale construction will lead to a debt crisis in the Ministry of Railways and its affiliated companies.

However, experts have dismissed such worries, saying that the ministry's debt ratio is still under control.

The ministry posted a loss of 3.76 billion yuan (578 million U.S. dollars) for the first quarter of 2011, according to a statement posted on the Shanghai Clearing House, an inter-bank clearinghouse authorized by the People's Bank of China and the Ministry of Finance.

The figure is greater than the 2.74 billion yuan in after-tax profits reported by the ministry for the entire year of 2009.

An unnamed official from the ministry said that the first quarter losses were mainly due to rising raw material costs, including crude oil, steel and other materials used in rail construction.

"Crude prices jumped by almost 1,000 yuan per tonne during the first quarter. That alone cost the ministry an extra 1.55 billion yuan," the official said.

Zheng Xinli, former deputy director of the Policy Research Office of the Central Committee of the Communist Party of China, echoed the official's view.

"Rail investment is huge at the present time. But when major projects are completed, the investments will decrease and the ministry will swing back into the black," Zheng said.

"We should also look at the long-term profits of the rail projects," Zheng said.

The value of the railway ministry's total assets hit 3.41 trillion yuan at the end of March, while its total liabilities stood at 1.99 trillion yuan. The debt ratio was 58.36 percent, according to the clearinghouse's statement.

The ministry, which acts as a corporation in the debt market, has issued at least 50 billion yuan worth of bonds this year to finance the country's expanding rail network..

Railway Minister Sheng Guangzu said at a press conference in March that the ministry's debt ratio was within a "safe" range. Sheng added that many multinational companies have debt ratios of around 58 percent.

Sheng said the construction of high-speed railways requires large long-term investments, therefore it is reasonable to expect the debt ratios of companies affiliated with the railway ministry to exceed 60 percent.

"It's impossible to rely on a ministry's own capital to finance a nation's rail construction. All countries need to borrow from banks," he added.

China plans to spend as much as 2.8 trillion yuan on railway infrastructure during the 12th Five-Year Plan period (2011-2015) as it works to solve transportation problems and boost economic development.

There have been reports in the media that the ministry will scale back its infrastructure investments by 100 billion yuan this year to reduce its debts. These reports cited He Huawu, chief engineer of the ministry.

Sun Zhang, a professor with Tongji University, suggested that the ministry lower the prices of high-speed train tickets prices to attract more customers.

"For now, the high-speed trains don't have many riders, because fares are too high for most Chinese. Many migrant workers, who return annually to their hometowns, cannot afford to buy gifts for their families if they choose to ride the high-speed trains," Sun said.

He supports the ministry's move to decrease operating speeds on its new bullet train lines and to allow more variation in ticket prices based on market demand.

The top speed for some of these high-speed trains will be reduced from 350 kilometers per hour to 300 kilometers per hour, according to the ministry.

"Lowering speeds will not only reduce safety risks, but also help pay for the expensive high-speed rail network by cutting fares and increasing the number of passengers, which could be a solution for reducing debt for the ministry and state-owned rail companies," Sun noted.

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