Explained: China's Nearly $1 Trillion 'Bullet' Debt Problem

China is rapidly working on expansion of its over 40,000 km long bullet train network, which is world's largest high speed rail (HSR) network and is ten times the size of that of the second largest Asian HSR operator Japan.

In 2021, China’s high-speed rail network had covered 93 per cent of the country’s cities with a population of over 500,000. The Asian giant now seeks to increase its high-speed rail network to 50,000 km by 2025 and 70,000 km in 2035, a roughly 70 per cent jump from 2021.

China expects railway construction to boost economy

The recent Covid surge in China has negatively impacted the country's economy and the Communist Party government in Beijing had on 31 May announced comprehensive economic stimulus measures to lift China's coronavirus-hit economy, including allowing state-run China Railway to issue another 300 billion yuan (~$45 billion) worth of railway construction bonds.

Besides, the regional governments in China have been competing to attract new projects including those in high-speed rail sector, in hopes of creating jobs and fostering related businesses to revive the economy.

HSR network expansion and state-run rail operator's liabilities

However, China's goal to expand the HSR network has taken precedence over concerns about debt and profitability as the State-Run China Railway, that operates the HSR network, is facing the effects of a debt trap caused by massive borrowing by provincial governments in recent years to monetise their HSR lines.

The aggressive campaign to expand the HSR infra has added to the state-owned operator's total liabilities, which as of the end of 2021 reached 5.91 trillion yuan ($882 billion), or around 5 per cent of China's gross domestic product.

China's 'hidden' debt

The liabilities of the state-run rail operator are expected to grow in future, raising concerns over China's "hidden debt" looming over its economic outlook.

Zhao Jian, a professor at Beijing Jiaotong University, was quoted by the Nikkei Asia as saying, “The government’s emphasis is economic growth, and it doesn’t care about debt repayment, but each km of railway costs 120 million yuan (~$18 million) to 130 million yuan (~$19.5 million) to build.”

China's plan to expand the HSR network by another 30,000 km is likely to cost around $3.6 trillion yuan ($537 billion).

To cover the cost, China Railway is selling bonds to state-owned banks and brokerages.

In essence, this “hidden debt” enables the government to borrow money without increasing the total amount of the official national debt.

China Railway's uphill battle to repay the debt

Given these heavy losses, the Railway will have difficulty paying back those debts.

“Its passenger numbers were down 29 per cent from pre-pandemic levels at 2.53 billion last year and remained sluggish in January-March amid a wave of COVID-19 infections,” the Nikkei report added.

On 22 April, China Railway opened the new Huanggang-Huangmei high-speed rail link.

A resident near one of its stations told Nikkei that “only a few dozen locals ride it a day,” adding that the link had failed to draw new hotels and other businesses to the predominantly agricultural region.

China trying to curb the debt problem

In March 2021, China’s State Council, the highest organ of state power, issued a warning, urging investors to reduce their HSR spending to avoid falling further into a debt trap.

Last year, the chairman of China’s Railway, Chairman Lu Dongfu, also said Railway would monitor investment returns and manage the debt it owes to reduce risks.

Freight service is key to the company's debt-management plan.

"The company operated 22 per cent more freight trains to Europe in 2021 from the year before, and 8.9 times as many as in 2016," Nikkei reported.

Groupwide revenue from freight service came to 435.9 billion yuan (~65 billion) last year, outpacing the 302.1 billion yuan for passenger service.

Since 2020, China Railway has also listed a number of its subsidiaries to draw investment from the private sector.

A small amount of private money won’t impact China Railway, a sizable state-owned organization.

However, Professor Zhao was quoted in the Nikkei report as saying that "a small amount of private funds will have little effect on China Railway, a massive state entity".