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China’s high-speed dream hits the buffers

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When Li Keqiang, China’s premier, took 16 European leaders on a high-speed train ride in 2015, the trip revealed more than an enthusiasm for rolling stock. It was also Beijing’s big sell for an engineering technology that it hoped would spearhead the launch of a grand geo-strategic ambition.

China’s ability to build high-speed railways more cheaply than its competitors gave the technology a central place in “One Belt, One Road”, Beijing’s ambitious scheme to win diplomatic allies and open markets across more than 65 countries between Asia and Europe by funding and building infrastructure.

Mr Li left his central and eastern European guests in no doubt of the link between smooth diplomatic relations and securing Chinese infrastructure. As their train hit 300km/h on the journey from Suzhou to Shanghai, he told them that Beijing was ready to “share” its rail technology since ties with the region were “like a train . . . that is not only fast, but also comfortable and safe”, according to an official account. He predicted that railway technology would become China’s “golden business card”.

But less than two years after these hopeful words were uttered, a Financial Times investigation has found that China’s high-speed rail ambitions are running off the tracks. Far from blazing a trail for One Belt, One Road, several of the projects have been abandoned or postponed. Such failed schemes, and some that are under way, have stoked suspicion, public animosity and mountains of debt in countries that Beijing had hoped to woo.

“In the early days of OBOR, China put a lot of emphasis on high-speed rail and mentioned it at almost every overseas state visit, advertising it as a strategic export along with nuclear power,” says Agatha Kratz, an expert on high-speed rail at the European Council on Foreign Relations, a think-tank. “But the effectiveness of high-speed rail diplomacy is actually very low, which is something that Chinese leaders are realising.”

Xi Jinping, China’s president, has called One Belt, One Road his “project of the century”, yet the tribulations that Chinese high-speed rail projects have encountered overseas may suggest a challenge to the intellectual foundations of that vision. So different is China with its huge population, authoritarian system and ample debt capacity that what works in the People’s Republic may be quite unsuited to many of the countries it is trying to court.

The setbacks are not limited to regions covered by One Belt, One Road, with the US and Latin America also having rail projects run into the sand.

In terms of scale, the rail push ranks as one of the biggest infrastructure undertakings in history. The total estimated value of 18 Chinese overseas high-speed rail schemes — including one completed (the Ankara-Istanbul service), five under way and 12 more announced — amounts to $143bn, according to a study by the Center for Strategic and International Studies, a Washington-based think-tank, and the Financial Times. To put this number in context, the US-led Marshall Plan, which helped revive Europe after the second world war, was completed with $13bn in American donations, a sum equivalent to $130bn today.

Chinese railway officials at a rail exhibition in Tripoli in 2010. China won work on a line to Sirte but the country’s civil war halted the project © AFP

The size of China’s grand design has made its many shortcomings all the more eye-catching. The combined value of cancelled projects in Libya, Mexico, Myanmar, the US and Venezuela is $47.5bn, according to FT estimates.

This is almost double the $24.9bn total value of the five projects under way in Laos, Saudi Arabia, Turkey and Iran, where two lines are under construction, according to CSIS estimates.

Some of the cancellations have resulted from factors well beyond Beijing’s control. In Libya, for instance, the outbreak of civil war in 2011 put paid to a $2.6bn project to build a line from Tripoli to Sirte, hometown of the late dictator Muammer Gaddafi.

In other cases, the schemes appear to have unravelled amid criticism of China’s approach. Mexico’s 2014 decision to cancel a $3.7bn contract was made to ensure “absolute clarity, legitimacy and transparency”, transport minister Gerardo Ruiz Esparza said.

In the US, XpressWest’s decision last year to cancel a line from Los Angeles to Las Vegas was partly based on China Railway International’s “difficulties associated with timely performance”, XpressWest said.

In the case of Venezuela, a project once touted by the late president Hugo Chávez as bringing “socialism on rails” to the Latin American nation, has become what locals call a “red elephant” — a dilapidated and vandalised line of stations and tracks.

“China is hitting an implementation wall in its efforts to promote high-speed rail abroad,” Ms Kratz says.

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So why is it that so many rail projects backed by China’s unrivalled financing firepower, huge construction companies and advanced technology fall by the wayside? The answers reveal much about the limitations in Beijing’s global development vision.

Three projects investigated by the FT — one in Laos, one in Indonesia and one between Serbia and Hungary — reveal shortcomings and mismatches that threaten to hobble China’s power projection not only in these countries but beyond.

The first issue surrounds the vastly divergent capacities to take on and absorb debt. China’s economic heft and authoritarian system allows companies that enjoy effective government guarantees to load up on loans and operate at a perennial loss. China Railway Corporation, the state-owned rail operator and investor in the country’s high-speed networks, has debts of Rmb3.8tn ($558bn), much more than the national debt of Greece. This is partly because much of the 22,000km of high-speed rail in China runs at a loss, officials say.

Yu Weiping, vice-president of CRRC, China’s high-speed rail rolling stock manufacturer, agrees that the question of profitability for high-speed rail projects is a valid one. “People doubt whether high-speed rail can be profitable, but the figures announced by China Railway Corporation in 2015 [show] profitability has been achieved on six lines,” Mr Yu told the Financial Times.

Abandoned infrastructure in Guárico state, Venezuela from the overdue Tinaco-Anaco line seen as a ‘red elephant’ © AP

A country the size of China, with its strong sovereign credit rating and $3tn in foreign exchange reserves, can support a hefty debt load. But Laos, with a gross domestic product of $12.3bn in 2015, is much less able to absorb the cost of a high-speed railway that has been slated to cost $5.8bn — just shy of half of the country’s GDP.

The 417km line under construction in Laos runs from the Chinese border to Vientiane, the capital. Doubts were expressed even before it was formally agreed. In 2013, the Asian Development Bank called the project’s proposals “unaffordable”, according to media reports cited on the bank’s website. The World Bank in the same year urged a “careful review of the implications for debt sustainability”.

A Chinese feasibility study sent to Vientiane in 2012 estimated the railway would generate an internal financial rate of return of just 4.6 per cent, according to an official document seen by the FT. Such a slim margin meant that Chinese rail companies were reluctant to invest in the project, according to a report to the Laos parliament by Somsavat Lengsavad, the then deputy prime minister.

Beijing suggested that Laos should be the main investor in the project, financing it by borrowing from China’s Ex-Im Bank, according to Mr Somsavat’s report. The Laos government’s foreign media department did not respond to a request for comment on the cost of the rail line and its impact on the country’s debt position.

A train bound for Istanbul prepares to leave Ankara on the Chinese-built high-speed line. © AFP

Critics of the railway say China has furthered its aims at the expense of Laos. They note the railway forms a crucial link in a grand plan to build a high-speed link from the southwestern Chinese city of Kunming through Thailand and Malaysia to Singapore.

“The high-speed railway through Laos makes little economic sense,” says Murray Hiebert, Southeast Asia expert at CSIS. “China’s goal is clearly to find a land route to move goods from western China to mainland Southeast Asia. But with Laos’ small population and economy, little of this trade would stay in Laos and Laos would ship very little to China on the railway.”

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Stephen Groff, a vice-president of the ADB, makes a similar point, though he declined to comment on the Laos railway specifically. “The real beneficiaries of those investments are especially at either end. Along the way, there are a lot of poor communities that don’t see the immediate benefit of those investments,” he says. “If there is little economic benefit to the country, they should be demanding significantly better terms.”

In the case of Indonesia, the mismatch is not so much one of debt capacities but of political systems. China’s authoritarian system ensures that its state-owned rail companies face few obstacles securing land and construction permits in their home market.

But Indonesia is a vibrant democracy with strong land tenure laws. More than a year after an official groundbreaking ceremony for the $5.5bn Jakarta to Bandung line was held in January 2016, construction has yet to start in earnest because of a failure to buy up the land across which the tracks are set to run, officials say.

Jakarta is also recalculating the cost of the 142km project amid expectations of considerable overruns, officials have said. But a senior Indonesian government official, who asked not to be identified, says Joko Widodo, Indonesia’s president, is committed to the scheme.

“We told the Chinese that our fates are bound together on this,” the official adds. “If they can’t get it going, they’ll damage their reputation in many countries where they want to invest. If our president cannot show good progress on this by the election in 2019, it will be very bad too.”

The problems have been compounded by broader suspicions over Chinese investment, according to Xue Gong, an analyst at the S Rajaratnam School of International Studies in Singapore. She says Chinese state-owned companies, built on backroom deals with government officials, are not used to the levels of political unpredictability and scrutiny encountered in Indonesia. “To what extent are they open to the public in a country where public opinion may influence the fate of the investment?” she asks.

In Europe, the high-speed rail technology that Mr Li lionised during his 2015 train ride has hit administrative buffers. Far from bearing out the premier’s prediction that it would showcase China’s “advantageous production capacity, advanced technology and high cost-performance”, the inaugural Chinese high-speed rail project in Europe has stoked official suspicion.

The European Commission has launched an investigation into the 350km line slated to run between Serbia’s capital Belgrade and Budapest in Hungary, European officials say. It will assess the financial viability of the $2.89bn railway and look at whether it has violated EU laws stipulating that public tenders must be offered for large transport projects, the officials add.

The investigation’s findings are not available, but any administrative setback for the Serbia-Hungary line would resonate beyond the initiative itself. The project was touted as evidence of the benefits that broad diplomatic engagement with China can bring.

A worker walks past a China Railway Engineering Corporation cement factory on the Tinaco-Anaco railway project in Guárico state, Venezuela. The partially built line has been abandoned © Bloomberg
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