Why China has lost a fifth foreign railway project

June 14, 2016 11:07
With many of China's biggest cities now covered by a high-speed rail network, the country needs foreign markets to absorb its excess manufacturing capacity and allow it to display its advanced technology. Photo: internet

Last week, Xpress West, a private US firm that planned to build a high-speed rail link between Los Angeles and Las Vegas with Chinese companies, suddenly said it was terminating the project, less than nine months after it was announced.

It is the fifth overseas project involving Chinese firms to be scrapped or revised in just 18 months – the others were in Mexico, Venezuela, Indonesia and Thailand.

For Beijing, the loss of the US project was the most galling.

The deal was announced with great pomp during President Xi Jinping’s visit to the United States in September as a good example of high-tech co-operation between the two countries.

The US is the world’s biggest economic power; projects there are prestigious for foreign companies, a shop window to the world.

In just 12 years, China has built the world’s largest high-speed rail network, extending 17,000 kilometers across the country.

With many of its biggest cities now covered by the network, it needs foreign markets to absorb its excess manufacturing capacity and allow it to display its advanced technology.

There have been successes.

In 2014, China’s first overseas high-speed rail project was completed in Turkey, a 533 km line linking the country’s two main cities, Ankara and Istanbul.

Last year, Chinese and Russian firms agreed on a contract worth US$380 million for surveys and designs for a 770 km line linking Moscow and Kazan.

There are several reasons why Chinese rail construction firms have not always been successful overseas.

One is that markets abroad are completely different to the one at home.

A World Bank study found that Chinese firms build domestic high-speed lines for about half the price their competitors in Europe spend for the same result.

They spend only 8 per cent of their budget on buying land from farmers who have no say in how much they receive.

Land acquisition abroad is more costly, time-consuming and litigious.

At home, they have access to unlimited, low-cost funding from state banks.

Beijing regards high-speed trains as essential for the growth of the economy and for uniting the country.

But are they profitable?

Studies have shown that only four high-speed rail lines in the world make enough profit to pay for their construction – Tokyo-Osaka, Paris-Lyon, Beijing-Shanghai and Beijing-Tianjin – because of the very high population density along the routes.

So, governments who want these lines must pay for their construction themselves or try to find external financing; commercial banks and private investors will not pay for them.

Venezuela abandoned its high-speed line because the fall in oil prices has pushed the country close to bankruptcy.

For the same reason, many are skeptical that the Moscow-Kazan line will ever be completed.

If oil prices remain low, Russia cannot afford it – and China is not going to pay for it.

Another problem is that granting a high-speed rail contract is a political and diplomatic decision as well as an economic and technological one.

China’s rivals are Japan, France and Germany, which have decades of experience in the international commercial market.

They have links and connections that go back many years and ways to bring pressure on the host government.

By comparison, China is the new boy on the block. Its overseas expansion has only been within the last five to 10 years.

Take Indonesia, where China and Japan are competing fiercely for a high-speed line between Jakarta and Bandung.

In January, the government announced it was suspending the project with China just one week after a ground-breaking ceremony, because the necessary permits had not been granted.

Japan had been bitterly disappointed by the award to China.

Indonesia is the largest overseas recipient of funds from Japan’s Official Development Assistance agency, and Japan is also its largest export partner.

Similarly, in March this year, the Thai government abruptly announced that it would not use a Chinese loan negotiated over nine rounds of painstaking negotiations during two years.

It shortened the planned high-speed rail line by two-thirds and said it would use its own funds to build it.

This is despite the fact that China enjoys excellent diplomatic and economic relations with Thailand.

The Thai transport minister said China had not offered the same interest rate on the loan as it had to Indonesia and that it should bear most of the cost of the line, from which it would benefit.

The third problem is that a high-speed rail line is unlike a cement factory or textile plant built by a foreign investor.

It is something of strategic importance, an important part of the national transport system, so many countries are cautious about ceding control over it to a foreign company.

“The Chinese government and companies still do not really understand overseas markets and the rules of the game,” He Jun, a senior researcher at Anbound, a Chinese think tank, said.

“Do Chinese firms properly analyze a destination country’s situations and risks?

"The risk analysis and assessment of a large overseas investment abroad should cover not only the financial issues and market risks, but also political, social, legal, cultural and religious problems.”

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A Hong Kong-based writer, teacher and speaker.