China’s Railway Diplomacy (Part I)

Posted by david on Dec 4, 2014 in Blog | 0 comments

Over the past few years, in tandem with China’s speedy mastery of high speed rail (HSR) technology and phenomenal growth of the HSR network throughout the country, along with the accolades have sprung up a multitude of criticisms from various quarters and over a wide range of issues.

Japan’s Kawasaki Heavy Industries has accused its Chinese counterparts of stealing technology and the Western press has disparaged China’s HSR safety record on account of the 2011 fatal collision in Wenzhou. Some international affairs commentators have even described the export of China’s HSR technology and construction of rail lines abroad as clear manifestation of China’s geo-political expansionist ambitions.

In a little more than a decade since China’s first HSR line between Qinhuangdao and Shenyang that ran at 200 km/hr (now considered ‘dongche’ speed (sub-high speed), China’s HSR network has extended to over 12,000 km, about four times as long as nearest rival Spain and more than half of the world’s total. By 2020, the Chinese Ministry of Railways wants to more than double that length to 25,000 km and connect all major cities. (Following the Wenzhou crash, train speeds were reduced from 350 km/hr to 300 km/hr but the Ministry has indicated it may raise it back up to 350 km/hr when deemed prudent.)

This two-part post focuses on the surge in expansion of China’s HSR overseas as the result of a unique mix of state strategy, financial wherewithal, centralized ownership of technologies, low cost construction, and offers of technical assistance that will assure China’s success in winning bids throughout the world, including in the developed world. So much so that foreign industry insiders complain their companies are ill-equipped to compete with China Railway Construction Corporation (CRCC) on cost and state support.

An article in Railway Technology (railway-technology.com) ascribes to the recently inaugurated 250 km/hr 533 km line between Istanbul and capital Ankara in Turkey, China’s first major completed HSR line abroad, as displaying the basic contours of China’s HSR export model – CRCC working in conjunction with the China National Machinery Import and Export Corporation (CMC) and Turkish firms Cengiz Construction and Ibrahim Cecen Ictas Construction. It represents China’s “deep commitment to cracking into and dominating the global high speed construction and rolling stock market”, wrote the author．

Last year, CRCC’s total revenue closed in on $95 billion but the company wants to greatly up the foreign share from 4% to 30%, reported Reuters. In the first nine months of 2014, CRCC has signed 115 billion RMB (US$18.7 billion) in worldwide contracts, roughly 1/5 of all new deals during that period. In May, the company created a unit to manage and coordinate its foreign operations. In addition, in preparation for better accessing international markets, China’s two domestic railcar makers, China Southern Railway (CSR) and China Northern Railway (CNR) Corporations have filed with the government to merge as the China Railway Transportation Co. with a combined market capitalization of $26 billion.

The Chinese government presides over project negotiations, leveraging the country’s centralized ownership of technologies that allows it to offer attractive export terms. The China Economic Review cites Ji Jialun, a professor at Beijing Jiaotong University’s School of Traffic and Transportation as saying it’s a luxury that few if any rival European and Japanese companies can afford since different technologies are controlled by different companies.

Much lower production and construction costs add to the attraction of Chinese bids. According to a World Bank study, based on cost efficiencies achieved at home, CRCC can build systems at US$17 to $21 million per kilometer, much cheaper than the $25-$39 million price range of European and Japanese companies. Most important, to attract developing countries that otherwise would balk at pricey HSR schemes, China is able to provide a very competitive financing regime. On the Turkish project, for example, the Chinese helped finance it with US$750 million in loans, including $500 million enjoying very favourable terms.

This is not to mention other well endowed funding channels like the China Development Bank and the Export-Import Bank of China that can coordinate support for the investment and trade activities of China’s state-owned enterprises abroad. China has also set up the BRICS bank with $50 billion to start as well as its most recent Asian Infrastructure Investment Bank (with China contributing more than half of the funding) and the $40 billion Silk Road fund envisaged by President Xi, all of which are geared toward infrastructural development and mitigating transport and other bottlenecks across Asia and the developing world. China surely doesn’t lack funds to back projects as its foreign exchange reserves have swelled to US$3.888 trillion as of the end of September.

Part II will look at other key projects the Chinese have won, actively bidding for, or interested in building.