Date
22 April 2019
Many local governments in the mainland are jumping on the bandwagon of building subways regardless of their actual financial capabilities. Photo: CNSA
Many local governments in the mainland are jumping on the bandwagon of building subways regardless of their actual financial capabilities. Photo: CNSA

Subway building frenzy aggravating local govt debt in China

The high-speed rail (HSR) has been hailed as one of the “four great new inventions” of China. 

China is not only building HSR networks across the nation, but also aggressively trying to export the technology to foreign markets. 

The HSR has facilitated economic development in some parts of the mainland and alleviated traffic congestion in cities.  

But while some HSR projects paid off, others didn’t.

In China and other countries, many railway projects have become white elephants, suffering from poor cost-effectiveness and low passenger traffic, and have turned into huge fiscal liabilities for local authorities.

One striking example is the proposed Moscow–Kazan high-speed railway project in Russia.

A few years ago, Chinese and Russian leaders discussed the initiative and signed a memorandum of cooperation to implement the project.

But on Dec. 25 last year, Russian First Deputy Prime Minister and Minister of Finance Anton Siluanov made a rare criticism of the rail project, saying it could hardly produce any economic benefits and therefore should not push through.

As China’s economic engine shows signs of slowing, Beijing is once again resorting to investments in infrastructure projects in a bid to sustain national economic growth.

However, as more and more overseas HSR projects have ground to a halt in recent years, and with the domestic rail market about to reach a saturation point, the Chinese government is now setting its sights on domestic subway projects as a new growth engine.

True, it would be a pretty reasonable option to build extensive subway networks in densely populated and prosperous cities.

The problem is, a lot of local governments are jumping on the bandwagon of building subways regardless of their actual financial capabilities, and not because their towns or counties need them, but just because they want to pull off something big and grandiose.

Amid worries over mounting local government debt and the focus on deleveraging and risk control, Beijing finally intervened in 2017 and halted a number of unpromising subway projects in cities like Baotou in Inner Mongolia and Wuhan in Hubei province. 

Then in July 2018, the general office of the State Council released guidelines to strengthen supervision of urban rail transit. 

Under the new rules, the threshold for building local subways is raised substantially. 

For example, in order to get the green light from Beijing for constructing its own subway network, a city must have a fiscal revenue of 30 billion yuan (US$4.38 billion) and a GDP of at least 300 billion yuan, compared with only 10 billion yuan and 100 billion yuan respectively in the 2003 guidelines. 

With regard to light rail projects, a city has to have a fiscal revenue of at least 15 billion yuan and a GDP of 150 billion yuan in order to secure Beijing’s seal of approval. 

The National Development and Reform Commission (NDRC) has started to loosen its grip on local subway projects in recent months in an attempt to rescue the country’s weakening economy. 

In August 2018, the NDRC approved the construction of four new subway lines in the city of Suzhou in Zhejiang province, which would cost a combined 95 billion yuan, despite the fact that the subway network currently run by the city hasn’t demonstrated much cost-effectiveness. 

The NDRC’s thumbs-up for the new Suzhou subway program has been widely seen as an indication of Beijing’s policy shift in this regard.

It is a costly undertaking for any local government to operate, maintain and subsidize a subway network. 

While HSR projects are well looked after by central enterprises and the central administration, the financial burden of running and maintaining subways often rests entirely upon the local authorities. 

And as private property prices across the mainland have continued to fall, it is very difficult for local governments to ease their financial woes through land sales. 

Although it would be hard to imagine the same bankruptcies in certain cities in the United States to take place in China due to the latter’s different system and lack of public debt transparency, local government debt in the mainland has actually reached astronomical figures. 

That said, many local governments in China would go bankrupt in technical terms if they continued to press ahead with “white elephant” subway projects. 

This article appeared in the Hong Kong Economic Journal on Jan 1  

Translation by Alan Lee 

[Chinese version 中文版

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JC/CG

Hong Kong Economic Journal contributor

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