China to Open Rail to FDI?

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May 24 – China’s Ministry of Rail has released plans to permit private investment into the country’s rail sector on a massive scale. The Ministry is struggling with huge debts, corruption issues and a series of high profile accidents, and is at the same time under pressure to expand China’s rail network and investment. Private investors will be encouraged to bid for contracts, establish subsidiaries that may list on stock markets, and permit pension funds to invest in rail as an investment, the Ministry said in a policy document released last Friday.

The announcement follows last Fall’s annual parliamentary sessions that rail would be one of seven key industries that would be opened to the private sector for the first time. China suffers from bottlenecks in its rail track system, insufficient capacity, overcrowding, and high operating costs. The Ministry lost US$1.1 billion in Q1 this year, and has debts of some US$384 billion in total. As a consequence, several high profile plans – such as the much-touted national high speed rail network, and overseas investments such as the Chinese funded rail line from Xinjiang to Mecca, have stalled.

However, the policy note did not elaborate as to whether foreign investors will be allowed to participate in the privatization scheme. Companies such as Alstom, Bombardier, GE and Kawasaki all have significant investments in rail in China, but to date have been restricted to the provision of components. International businesses have complained concerning the awarding of tenders in the sector, which almost always see projects secured by Chinese contractors. Whether the market truly opens and obtains external funding and expertise is a matter of some sensitivity for China. However, questions over its hand being forced by the appalling management of its rail system to date, or whether the policy document is just another way of swirling money around internally, remains to be seen.

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