China's Rail Investment Needs Pricing Reform

"For decades, China has neglected investment in railroads in favor of building highways", resulting in an 'oversubscribed' rail system - both for freight and passengers.

"The nation's rails carry a quarter of global train cargo and passenger traffic on only 6% of the world's track, making its system the busiest on the planet."

"China is now undertaking the world's biggest railway expansion since the U.S. laid its transcontinental line in the 1860s. Beijing plans to spend $248 billion through 2020 on 75,000 miles of new track, for both freight and high-speed passenger lines. At that point, China's high-speed passenger network will likely be the biggest on earth."

However, this huge infrastructure investment belies China's main rail problem, according to Business Week - it's pricing system.

"China's Ministry of Railways, which operates the railroads, has a net profit margin of less than one percent on revenues of about $35 billion. The Ministry maintains majority control over all rail lines and sets freight rates for farm products and ticket prices for migrant workers at artificially low levels. It wouldn't comment for this article.

That pricing policy is politically smart but commercially ruinous.

Pressure on the Ministry of Railways to find the billions needed for all this expansion may eventually force it to loosen its grip on pricing and cede control of at least some of the railroads. "There is a lot of capital now that is very interested in building railroads," says Zhao Jian, a professor at Beijing Jiaotong University who researches railway reforms. Until that happens, China's rail industry will continue to attract more business than it can handle and fewer investors than it needs."