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The city of Shijiazhuang, a three-hour drive from Beijing, received some long-awaited news on September 5. The city, capital of north China’s Hebei Province, got the go-ahead to build its first subway from the National Development and Reform Commission (NDRC), China’s top economic planning agency.
“Subway construction has far-reaching significance for Shijiazhuang,” said Jiang Deguo, the city’s mayor. “It will help complete the city’s transportation system.”
Shijiazhuang residents have long desired a subway system because rush-hour congestion has made life miserable. Alongside the expansion of Chinese cities and urban population growth, transportation infrastructure has been deteriorating in a number of cities, and subway construction is widely perceived as a panacea.
Shijiazhuang was not the only city to welcome news from the NDRC. On September 5, the agency announced on its website the approval of plans and feasibility reports for 25 urban rail projects in cities including Taiyuan, Lanzhou, Guangzhou and Xiamen. The projects will cost more than 800 billion yuan($126.88 billion).
The announcement marks the second round of government-driven investment fever this year. In August, the NDRC approved a batch of investment projects mainly focused on cement, iron and steel, construction, communications and equipment manufacturing sectors.
For Zhou Li, a professor at Tsinghua University School of Economics and Management, investment in urban rail projects is worthwhile since it boosts the economy and improves residents’ well-being.
“On the one hand, it has a leverage effect, which will benefit downstream enterprises related to subway construction and hence help sustain economic growth. On the other hand, it will improve urban transportation conditions, which is quite an urgent need for many cities,” said Zhou.
Benefits
Four years ago, the Shijiazhuang Municipal Government submitted a petition to the NDRC on rail construction. The blueprint revealed plans to build three subway lines at a cost of 43 billion yuan ($6.82 billion). Among the total, 40 percent, or 16.88 billion yuan($2.68 billion), would be earmarked by the local government, and the rest would come from bank loans.
The petition was initially denied, likely because of the NDRC’s and the central bank’s concerns over bank loan risks and the fact that the Chinese Government had already launched a 4-trillion-yuan ($586-billion) stimulus package in 2008.
However, the NDRC continued to receive applications for subway construction as more and more cities faced growing traffic congestion.
China’s rail transportation development lags behind developed countries, said Wang Mengshu, an academic at the Chinese Academy of Engineering and assistant chief engineer of the China Railway Tunnel Group Co. Ltd.
“In Tokyo and Paris, about 70 to 80 percent of the population chooses to commute through the rail system while the percentage in China’s most developed cities such as Shanghai and Beijing is only 40 percent. The per-capita track length in Tokyo is 20 cm while it is only 2.1 cm in Beijing. Without a doubt, China needs more rail construction to solve its transportation woes,” said Wang.
Another benefit to rail construction is economic growth. China has seen its economy slow down since the last quarter of 2010. There are three driving forces for economic growth—namely exports, investment and consumption. Under the circumstances of dwindling exports and sluggish domestic demand, investment has once again become a key tool for economic growth, said Zhou. In light of this, the NDRC approved urban rail projects in 25 cities.
This move marks the government’s latest effort to stabilize growth, according to a report by Minsheng Securities.
Generally speaking, the NDRC considers three factors when assessing applications for subway construction: urban population, GDP and local finance. Nearly 50 Chinese cities qualify for subway construction based on the criteria, and 40 of them have already applied to the NDRC. By 2020, the total track length of China’s rail system will amount to 5,500 km. With a current cost of 400 million yuan ($63.44 million) per km, the total cost is expected to reach 2.2 trillion yuan ($348.9 billion).
With the approval of these 25 projects, a new boom in iron and steel, cement, digital information and real estate sectors is likely. These multiple effects will bolster economic growth in those approved cities, said the report.
Local finance will shoulder 25 to 50 percent of the total 800-billion-yuan investment and the rest is likely to come from bank loans and land sales alongside the rails. Therefore, financing is key for implementing those plans, said the report.
“Urban rail construction will accelerate the free flow of population, logistics and information, and hence promote economic development,” said Xu Fengxian, a research fellow at the Institute of Economics under the Chinese Academy of Social Sciences. “Right now, China is facing a slowing economy, and intensive rail construction will help related sectors to recover and further develop.”
Concerns
The fact that 25 urban rail projects were approved in a day has not been without contention.
Some think the Central Government has“investment thirst” and is under the pressure of “sustaining growth,” which could bring with it the same repercussions following the 4-trillion-yuan stimulus package. Back in 2008, in an effort to boost the economy amid the global financial crisis, the Chinese Government injected 4 trillion yuan into the market. Side effects later arose, including inflation, skyrocketing housing prices and investment bubbles because the injected liquidity was used by some for speculative activities.
Others say approval of these projects is simply part of the 12th Five-Year Plan(2011-15), which by nature is different from the earlier stimulus. They say China’s rail construction is lagging far behind and these approved projects are long overdue.
Regardless, a more important issue at hand remains: Where will the money come from?
These projects will have a limited effect in helping local governments sustain growth because of a lack of funds, said Zhao Qingming, a guest professor at the University of International Business and Economics in Beijing. Banks won’t be as reckless as they were in 2008 when the 4-trillion-yuan stimulus package was rolled out. The assessment for loans will be stricter, making it difficult for some projects to come to fruition, he said.
Subway construction is costly. Take the city of Lanzhou for instance. The approved rail transportation network consists of six lines, with a total length of 207 km and investment of nearly 100 billion yuan ($15.86 billion). However, the yearly fiscal revenue in the city is only 10 billion yuan ($1.59 billion), among which less than 1 billion yuan ($158.6 million) is earmarked for expanding infrastructure.
Subway system projects are underway in 28 cities nationwide but are being built at a slow pace due to a lack of funds. Some cashstrained cities in central and western China run out of cash after completing one subway line or even sooner. Construction of the Zhengzhou subway was once halted because of capital shortage.
In the past, the Central Government was only responsible for approving projects while local governments wrestled with how to pay for them. Today, money comes from three sources: local governments, the Central Government and bank loans.
However, local revenue is shrinking as land sales, which accounts for 40 percent of the total income, have continuously dropped after the Central Government intervened to cool the housing market. In the first half of 2012, land sales nationwide totaled 1.14 trillion yuan ($180.8 billion), a 27.5-percent year-on-year drop, diminishing local government finances.
Among those 25 cities with approved urban rail projects, 23 face a combined pressure of 350 billion yuan ($55.51 billion) to finance the lines, according to local government revenue reports.
With commercial banks taking a cautious stance to avoid the consequences of the 2008 stimulus spending spree, financing the projects will be an ongoing problem.
Even if financing is secured, paying back debts poses a further challenge. A report released by the Institute of Geographic Sciences and Natural Resources Research under the Chinese Academy of Sciences in March pointed out that almost all subway systems worldwide are running at a loss. The Beijing subway needs 2 billion yuan ($317.2 million) in subsidies per year while the Shenzhen subway has so far reported over 1 billion yuan($158.6 million) in losses, according to the report.
“Subway construction has far-reaching significance for Shijiazhuang,” said Jiang Deguo, the city’s mayor. “It will help complete the city’s transportation system.”
Shijiazhuang residents have long desired a subway system because rush-hour congestion has made life miserable. Alongside the expansion of Chinese cities and urban population growth, transportation infrastructure has been deteriorating in a number of cities, and subway construction is widely perceived as a panacea.
Shijiazhuang was not the only city to welcome news from the NDRC. On September 5, the agency announced on its website the approval of plans and feasibility reports for 25 urban rail projects in cities including Taiyuan, Lanzhou, Guangzhou and Xiamen. The projects will cost more than 800 billion yuan($126.88 billion).
The announcement marks the second round of government-driven investment fever this year. In August, the NDRC approved a batch of investment projects mainly focused on cement, iron and steel, construction, communications and equipment manufacturing sectors.
For Zhou Li, a professor at Tsinghua University School of Economics and Management, investment in urban rail projects is worthwhile since it boosts the economy and improves residents’ well-being.
“On the one hand, it has a leverage effect, which will benefit downstream enterprises related to subway construction and hence help sustain economic growth. On the other hand, it will improve urban transportation conditions, which is quite an urgent need for many cities,” said Zhou.
Benefits
Four years ago, the Shijiazhuang Municipal Government submitted a petition to the NDRC on rail construction. The blueprint revealed plans to build three subway lines at a cost of 43 billion yuan ($6.82 billion). Among the total, 40 percent, or 16.88 billion yuan($2.68 billion), would be earmarked by the local government, and the rest would come from bank loans.
The petition was initially denied, likely because of the NDRC’s and the central bank’s concerns over bank loan risks and the fact that the Chinese Government had already launched a 4-trillion-yuan ($586-billion) stimulus package in 2008.
However, the NDRC continued to receive applications for subway construction as more and more cities faced growing traffic congestion.
China’s rail transportation development lags behind developed countries, said Wang Mengshu, an academic at the Chinese Academy of Engineering and assistant chief engineer of the China Railway Tunnel Group Co. Ltd.
“In Tokyo and Paris, about 70 to 80 percent of the population chooses to commute through the rail system while the percentage in China’s most developed cities such as Shanghai and Beijing is only 40 percent. The per-capita track length in Tokyo is 20 cm while it is only 2.1 cm in Beijing. Without a doubt, China needs more rail construction to solve its transportation woes,” said Wang.
Another benefit to rail construction is economic growth. China has seen its economy slow down since the last quarter of 2010. There are three driving forces for economic growth—namely exports, investment and consumption. Under the circumstances of dwindling exports and sluggish domestic demand, investment has once again become a key tool for economic growth, said Zhou. In light of this, the NDRC approved urban rail projects in 25 cities.
This move marks the government’s latest effort to stabilize growth, according to a report by Minsheng Securities.
Generally speaking, the NDRC considers three factors when assessing applications for subway construction: urban population, GDP and local finance. Nearly 50 Chinese cities qualify for subway construction based on the criteria, and 40 of them have already applied to the NDRC. By 2020, the total track length of China’s rail system will amount to 5,500 km. With a current cost of 400 million yuan ($63.44 million) per km, the total cost is expected to reach 2.2 trillion yuan ($348.9 billion).
With the approval of these 25 projects, a new boom in iron and steel, cement, digital information and real estate sectors is likely. These multiple effects will bolster economic growth in those approved cities, said the report.
Local finance will shoulder 25 to 50 percent of the total 800-billion-yuan investment and the rest is likely to come from bank loans and land sales alongside the rails. Therefore, financing is key for implementing those plans, said the report.
“Urban rail construction will accelerate the free flow of population, logistics and information, and hence promote economic development,” said Xu Fengxian, a research fellow at the Institute of Economics under the Chinese Academy of Social Sciences. “Right now, China is facing a slowing economy, and intensive rail construction will help related sectors to recover and further develop.”
Concerns
The fact that 25 urban rail projects were approved in a day has not been without contention.
Some think the Central Government has“investment thirst” and is under the pressure of “sustaining growth,” which could bring with it the same repercussions following the 4-trillion-yuan stimulus package. Back in 2008, in an effort to boost the economy amid the global financial crisis, the Chinese Government injected 4 trillion yuan into the market. Side effects later arose, including inflation, skyrocketing housing prices and investment bubbles because the injected liquidity was used by some for speculative activities.
Others say approval of these projects is simply part of the 12th Five-Year Plan(2011-15), which by nature is different from the earlier stimulus. They say China’s rail construction is lagging far behind and these approved projects are long overdue.
Regardless, a more important issue at hand remains: Where will the money come from?
These projects will have a limited effect in helping local governments sustain growth because of a lack of funds, said Zhao Qingming, a guest professor at the University of International Business and Economics in Beijing. Banks won’t be as reckless as they were in 2008 when the 4-trillion-yuan stimulus package was rolled out. The assessment for loans will be stricter, making it difficult for some projects to come to fruition, he said.
Subway construction is costly. Take the city of Lanzhou for instance. The approved rail transportation network consists of six lines, with a total length of 207 km and investment of nearly 100 billion yuan ($15.86 billion). However, the yearly fiscal revenue in the city is only 10 billion yuan ($1.59 billion), among which less than 1 billion yuan ($158.6 million) is earmarked for expanding infrastructure.
Subway system projects are underway in 28 cities nationwide but are being built at a slow pace due to a lack of funds. Some cashstrained cities in central and western China run out of cash after completing one subway line or even sooner. Construction of the Zhengzhou subway was once halted because of capital shortage.
In the past, the Central Government was only responsible for approving projects while local governments wrestled with how to pay for them. Today, money comes from three sources: local governments, the Central Government and bank loans.
However, local revenue is shrinking as land sales, which accounts for 40 percent of the total income, have continuously dropped after the Central Government intervened to cool the housing market. In the first half of 2012, land sales nationwide totaled 1.14 trillion yuan ($180.8 billion), a 27.5-percent year-on-year drop, diminishing local government finances.
Among those 25 cities with approved urban rail projects, 23 face a combined pressure of 350 billion yuan ($55.51 billion) to finance the lines, according to local government revenue reports.
With commercial banks taking a cautious stance to avoid the consequences of the 2008 stimulus spending spree, financing the projects will be an ongoing problem.
Even if financing is secured, paying back debts poses a further challenge. A report released by the Institute of Geographic Sciences and Natural Resources Research under the Chinese Academy of Sciences in March pointed out that almost all subway systems worldwide are running at a loss. The Beijing subway needs 2 billion yuan ($317.2 million) in subsidies per year while the Shenzhen subway has so far reported over 1 billion yuan($158.6 million) in losses, according to the report.