China Rail Ministry ‘Kingdom’ May Be Split Up on Fatal Crash
China Punishes Officials Over Rail Crash
STR/AFP/Getty Images
Workers clear wreckage after a Chinese high-speed train derailed and carriages fell off the elevated track when it was hit from behind by another express late on July 23 in the town of Shuangyu near the city of Wenzhou, in eastern China's Zhejiang province.
Workers clear wreckage after a Chinese high-speed train derailed and carriages fell off the elevated track when it was hit from behind by another express late on July 23 in the town of Shuangyu near the city of Wenzhou, in eastern China's Zhejiang province. Photographer: STR/AFP/Getty Images
July 29 (Bloomberg) -- Jack Xu, an analyst with Sinopac Securities Asia Ltd. in Shanghai, talks about Chinese railway-related stocks. Shares of Beijing-based CSR Corp., the country’s biggest train maker by market value, have plunged this week in Hong Kong after the company confirmed it made one of the trains involved in a fatal high-speed rail crash on July 23. Xu speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
China’s deadliest high-speed train crash may hasten the breakup of a ministry that runs the world’s second-largest rail network, employs more people than the U.S. government and has debts larger than Denmark’s economy.
Premier Wen Jiabao has pledged more focus on safety and greater accountability following the July 23 crash that killed 40 people, endangering the Ministry of Railways’ dual grip on regulating and operating China’s trains. Dividing these roles may improve management, financial transparency and safety, said Hu Xingdou, an economics professor at the Beijing Institute of Technology.
“The rail ministry has been run like an independent kingdom for years,” Hu said. “The concentration of power has caused inefficiency and mismanagement, and it’s a hotbed for corruption.”
Sheng Guangzu, who became rail minister in February after his predecessor was removed during a bribery investigation, faces public anger over the accident, ministry ties to suppliers and the burial of a train carriage before rescue work was completed. He’s also wrestling with waning demand for ministry bonds and debts totaling 2.1 trillion yuan ($326 billion), or about 5 percent of gross domestic product.
Referee, Player
Separating the ministry’s regulatory and operating roles would bring the railways into line with other parts of China’s state-run economy, including aviation, telecommunications and energy. In those sectors, government-backed companies, which are often listed, run the day-to-day businesses while separate state agencies regulate them.
“The ministry’s dual role as referee and market player should be ended,” said Mao Shoulong, a public policy and politics professor at Beijing-based Renmin University of China. “The crash may provide a catalyst for the reform.”
The department, which employs 2.1 million people and has its own court system, accumulated and retained its powers partly because of a traditional national-defense role, Hu said. The Communist Party has relied on railways to speed troop movements since coming to power, he said.
The ministry’s media division didn’t reply to questions faxed by Bloomberg News last week.
Former rail minister Liu Zhijun said in 2008 that the organization wouldn’t be combined with the transport ministry because of the need to focus on building new lines, according to the Beijing News daily newspaper.
Bribery Probe
Liu was removed for taking bribes, state-run Xinhua News Agency said in February, citing the Communist Party’s Central Commission for Discipline Inspection and the Ministry of Supervision. The National Audit Office said in March it found that 187 million yuan was embezzled from construction of the Beijing-Shanghai bullet-train line, which opened in June.
The ministry uses a bidding process to award contracts for construction projects and buying new trains and equipment, according to the website of its engineering-project tendering unit. Still, it retains control of some parts-makers, said Yuan Gangming, a researcher with the Chinese Academy of Social Sciences.
“The ministry’s interests are closely tied up with its suppliers and subsidiaries, so it’s natural for the public to believe the ministry is responsible for the crash,” he said. “For that reason, it should be split up.”
Lightning Strike
The July 23 accident occurred when a train that stopped after a lighting strike was rear-ended by a second locomotive. Rescue workers initially buried one of the derailed carriages, though it was later dug up after public criticism. The ministry said the car was buried so a crane could move into position, according to a statement on its website.
A preliminary investigation attributed the crash to a signaling fault. A unit of China Railway Signal & Communication Corp., formerly part of the ministry, apologized after the crash. It didn’t say what equipment it had designed or built.
The State Administration of Work Safety, which reports to the State Council, or Cabinet, is now leading a full probe, according to Xinhua. The government also fired three officials, including the head of the regional rail bureau, and started a two-month review of railway safety.
Sheng pledged to ensure the “absolute” safety of high- speed railways by improving the quality of equipment, management and training, according to a statement posted on the ministry’s website yesterday.
Corporate Debt
Liu championed construction of the high-speed rail network, which opened in 2007 and is due to reach 16,000 kilometers (9,900 miles) by 2015. The nationwide rail network is set to reach 120,000 kilometers under a 2.8 trillion-yuan, five-year investment plan running through 2015.
The government now may slow that plan by as much as a year, said Karen Li, a JPMorgan Chase & Co. analyst in Hong Kong. During a July 28 visit to the crash site near Wenzhou in southeast China, Wen said the industry needed to place more emphasis on safety rather than expansion.
Even before the crash, the rail ministry, China’s largest issuer of corporate debt, was finding it harder to raise funds for construction and other projects because of tightening credit and concerns about its borrowings.
It was only able to find buyers for 18.7 billion yuan of one-year notes in a 20 billion-yuan sale on July 21. That was likely the first time the ministry had failed to reach a sales target, according to Guotai Junan Securities Co.
Schools, Hospitals
The yield gap between the ministry’s one-year notes and government debt has more than tripled this year to about 188 basis points, according to Chinabond data on the Bloomberg terminal.
The size of the debt may hinder efforts to break up the rail ministry, Stephen Green, a Hong Kong-based Standard Chartered Plc analyst, said in a July 29 note.
The ministry has been downsized previously as part of broader reforms, with hundreds of schools and hospitals it once controlled being handed over to local governments.
China Railway Group Ltd. (601390) and China Railway Construction Corp., the world’s two biggest listed heavy-construction companies, were also once part of the ministry before being transferred to the state-owned Assets Supervision and Administration Commission. The nation’s two biggest trainmakers, CSR Corp. and China CNR Corp., were also previously under the rail department.
The dismantling should continue following last month’s crash, Mao said.
“The ministry enjoys too high a ranking and too much power,” he said.
To contact the reporter on this story: Jasmine Wang in Hong Kong at Jwang513@bloomberg.net
To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net
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