China’s High-Speed Rail Debt Trap

China’s high-speed system is caught a debt trap, having to borrow money to repay the loans taken out to pay for rail construction. Although a few lines claim to be profitable, most are not. As a result, says an article published by New Delhi think tank Observer Research Foundation, since 2015 interest payments on China State Railway debt has been greater than high-speed rail revenues.

The article (all but the last four paragraphs of which is used as the narrative for the above video) was written as a warning that “Poorer countries trying to emulate HSR must be mindful of the pitfalls.” But it is equally valid as a warning to richer countries, where construction costs are higher and where the value of passenger rail is lower due to extensive networks of intercity highways and airports.

Although the country claims that some lines, such as Beijing-Shanghai, are profitable, even those profits are questionable when construction costs are considered. The state railway financed these lines by selling bonds that guaranteed 5.5 percent interest. Yet a 2019 article by economist Zhao Jian indicated that the Beijing-Shanghai lines return on assets was less than 5 percent. This led the railway to try to refinance the bonds, angering the insurance companies and other investors that were counting on the interest.
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The Observer article points out several facts I’ve noted before, including China State Railway’s $850 billion debt (as of a year ago — it’s probably closer to a trillion dollars now) and that the country has slowed construction of high-speed rail lines. The cancellation of at least two high-speed rail projects was not just because of the railway’s debt: China’s local government have also gone dangerously into debt building high-speed rail lines.

The Observer Research Foundation article also makes an argument that I’ve made about Europe and Japan but haven’t been able to document about China: that the emphasis on high-speed rail (which is only for passengers) rather than conventional rail (for freight and passengers) has forced much freight onto highways, where the environmental costs are much higher. Between 2015 and 2020, China’s high-speed rail miles grew by 91 percent while conventional rail miles grew by 7 percent. In 2018, China set a target of increasing rail freight by 30 percent by 2020, but I doubt the country met that target.

The attraction of high-speed rail, says the article, is that travel times may be “more than air travel, but with the comfort that only trains can provide.” When counting all the costs, however, flying first class is less expensive and just as comfortable as high-speed rail. People who want more comfort should buy their own first-class tickets and not expect taxpayers to subsidize them.