China's efforts to open itself to the world aren't meeting much success of late, with MSCI's refusal to admit the nation's stocks to its emerging markets index the latest blow to President Xi Jinping's ambitions. Now China's attempts to build hard physical connections are looking like they, too, may disappoint.
The developers of a planned high-speed railway between Los Angeles and Las Vegas this month pulled out of a joint venture with a unit of China Railway Group, the country's second-biggest builder.
That failure speaks to more than just the loss of a multibillion-dollar contract. Again and again, China has fallen short in exporting the know-how behind its high-speed rail network, the world's biggest.
A planned connection between Mexico City and the city of Queretaro was canceled in 2014 just days after it was awarded to a consortium led by China Railway Construction, another state-controlled builder.
Chinese dominance of a railway network touted by Premier Li Keqiang linking Singapore to the southwestern city of Kunming also suffered a blow last year, after Japan and Thailand signed an agreement to work together on a Bangkok-Chiang Mai high-speed train, a lucrative link in the chain. China and Japan are now fighting over bidding rights on the last section between Singapore and Kuala Lumpur.
Even Beijing's biggest victory so far, winning a contract to build a high-speed line between Jakarta and Bandung, is somewhat tainted by the easy terms that helped get it over the line. A key advantage for the Chinese consortium over its Japanese rivals was a promise not to request a funding guarantee from the Indonesian government -- an unusual, and potentially costly, concession for a multibillion-dollar project.
Why is China finding it so hard to bring these projects to fruition?
One reason is that in the world of high-speed rail, failures are more the norm than the exception. About three-quarters of high-speed rail traffic is in just three countries -- China, Japan, and France. Bullet train projects have long lead times, wildly varying construction costs, and mountains of difficulties to overcome. As a result, it's little coincidence that the countries where they've got off the ground tend to have an unusual degree of centralized coordination.
Do China Inc.'s failures to win overseas contracts matter? Credit Suisse certainly thinks so, arguing last week that the setback on the Los Angeles-Las Vegas bullet train will hit investor sentiment around Hong Kong-listed shares of China Railway, China Railway Construction, CRRC, and China Railway Signal & Communication, "despite low expectations" around their plans to go global.
Still, it might be worth asking whether Chinese railway builders really need an export market. The sheer difficulty of building mega-projects suggests they're better off sticking with what they know.
Take a look at the U.S. for an example. The 2009 Recovery Act promised $8 billion of grants to build a nationwide network of high-speed railways connecting Los Angeles, San Francisco, Seattle, Portland, and the Boston-New-York-Washington, D.C. Acela corridor.
Owing to the complexities of federal-state-municipal politics, the morass of permitting that surrounds any major construction project, and the cost of building in the U.S., to date the only concrete outcome has been a few viaducts and bridges around Fresno. One day, maybe, it will become a Los Angeles-San Francisco bullet train.
Over roughly the same period, China has gone from having not much more than 1,000 kilometers of high-speed rail tracks laid, to more than 10,000 kilometers.
That spending isn't over just because China's economy is slowing. Quite the opposite: The country's Ministry of Transport and the National Development and Reform Commission have promised 4.7 trillion yuan ($713 billion) to build 303 transport projects between now and the start of 2019, a stimulus splurge to counteract the effects of that weaker economic growth.
Economic planners can worry about the effects of all the extra debt that will be needed to finance these projects. If you're in the Chinese railway construction business, though, you should buy a bottle of vintage Moutai for that friendly official in the tendering department and get ready to start counting your cash. When China's spending more money on infrastructure than Western Europe and North America put together, who needs export markets?
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