China Unveils Rail Ministry Breakup to Curb Corruption

China will dismantle its rail ministry as the nation’s new leaders pare bureaucracy and battle graft in a department that has more than 2 million employees and a debt load larger than Denmark’s economy.

The Ministry of Railways will be split into two, according to a report to the National People’s Congress yesterday. Some functions will be put into a State Railway Administration under the Ministry of Transportation. A new company, China Railway Corp., will take over commercial operations, according to the plan.

The break-up of the railway ministry, burdened with 2.66 trillion yuan ($428 billion) of liabilities, follows the firing of the former rail minister in 2011 amid allegations of corruption and a high-speed train crash that killed 40 people later that year. It forms part of a broader government revamp as incoming leaders Xi Jinping and Li Keqiang face pressure to deliver on pledges to rein in graft.

“As the last major monopoly in China, the rail ministry never lacked corruption, bureaucracy and mismanagement,” said Chen Yao, an associate professor at Shanghai Jiao Tong University, who has published four books on Chinese government organizations and public policy. “The new leadership is sending a clear message that they are taking real actions and are serious about building a cleaner and more efficient government.”

Corruption Charges

The revamp won’t affect investment in railways and will help the industry to better meet market demand, Rail Minister Sheng Guangzu told reporters at the NPC yesterday. Wen’s report didn’t say what would happen to the position of rail minister. The ministry is China’s biggest issuer of corporate notes.

Sheng was appointed in 2011 after predecessor Liu Zhijun was ousted following allegations of corruption. Liu, who was later expelled from the Communist Party, was among the highest- ranked Chinese officials to face corruption-related charges until the downfall of Politburo member Bo Xilai.

Liu, who championed what he called “leapfrog development” of rail construction, was one of the officials held responsible for the high-speed train crash in 2011 that was one of the deadliest rail accidents in China. Mismanagement and design flaws were the main causes of the crash near the eastern Chinese city of Wenzhou, according to a government investigation.

Reform Prelude

The separation of the ministry’s regulatory and operating roles will bring the railways into line with other parts of China’s state-run economy, including aviation, telecommunications and energy.

“Railway was the only ministry that didn’t separate administration from management,” Zhao Jian, a professor of economics at Beijing Jiaotong University, said in a telephone interview yesterday. “The breakup is a very significant step as a prelude to reform.”

The railway administration will be in charge of establishing technology standards, supervising work safety, and overseeing service and project quality, according to yesterday’s report, which will be reviewed by the legislature. Planning and policy functions will be directly given to the transportation ministry and won’t be part of the new body, it said.

China Railway Corp. will be responsible for railway transportation dispatch and command, freight and passenger transportation business management and railway construction, the report said.

Railway Investment

“The state will continue to support railway construction and development, will accelerate railway investment and reform of the fundraising system and pricing,” said State Councilor Ma Kai, who read the report to the NPC yesterday.

Publicly traded railway companies such as the nation’s two biggest rail builders -- China Railway Group Ltd. (601390) and China Railway Construction Corp. -- as well as train maker CSR Corp., are likely to benefit from reduced bureaucracy, improved transparency, tariff hikes at the newly established China Railway Corp., Barclays Plc analysts led by Patrick Xu said in a note to clients yesterday.

“We view the reform positively,” the analysts said. “We expect it will be easier for China Railway Corp. to restructure its assets and debt as an incorporated company than the Ministry of Railways, providing increased flexibility to the funding of railway projects.”

Market Pricing

The reform may pave way for more flexible, market-driven pricing and assets consolidation, benefiting the two main listed rail operators Daqin Railway Co. and Guangshen Railway Co., Goldman Sachs Group Inc. analysts led by Ronald Keung said in a note today.

Guangshen Railway gained 1.9 percent to close at 3.26 yuan in Shanghai trading today, the highest level since Feb. 20. Daqin Railway gained 0.8 percent to 7.77 yuan in Shanghai.

China Railway climbed 0.7 percent to close at 3.07 yuan in Shanghai and China Railway Construction dropped 0.2 percent. CSR Corp was up 0.9 percent to close at 4.75 yuan.

Bonds

The rail ministry sold a record 164 billion yuan of bonds last year, helping it settle unpaid bills with train and track makers as the government boosted investment to spur GDP growth. China’s rail network is set to reach 120,000 kilometers (74,600 miles) under the five-year plan ending in 2015.

Borrowing costs for the ministry have fallen recently, hitting a seven-month low at end of February, amid speculation that the authority would be merged with the transportation ministry.

The government will study the existing debt and deal with it “seriously and appropriately,” Sheng told reporters in Beijing yesterday. The debt may be categorized by whether it involves railways for public use or commercial use, he said.

China may also award an order for bullet trains this month or next as the orders originally scheduled by the end of last year were withheld temporarily because of the leadership transition and the reform, Karen Li, an analyst with JPMorgan Chase & Co. said in a note yesterday.

“The change will improve transparency and raise the quality of fundraising,” Jia Kang, director of the finance ministry’s fiscal-science research institute, said in Beijing yesterday.

China has the world’s biggest high-speed rail network after opening a bullet train line linking two of its biggest cities, Beijing and Shanghai, and another linking the capital with Guangzhou, the capital of southern Guangdong province. Sheng said in January that the railways aim to spend 650 billion yuan on rail-related fixed-asset investment this year.

The rail ministry was already downsized in previous rounds of government restructuring, with hundreds of schools and hospitals it controlled being handed over to local governments.

To contact the reporter on this story: Jasmine Wang in Hong Kong at jwang513@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.