China rail: China's high-speed train tragedy underlines the significant risks of the runaway economy. If it fails to slow down properly, a crash is unavoidable. Things have been built quickly with little attention paid to safety and quality. This is financially unsustainable. A badly handled accident may even trigger political problems.
The collision of two high-speed trains confirmed the public’s worry about China's fast locomotives. The country now boasts of the world's longest high-speed rail network, after it redesigned imported trains to enable them to run at a much faster speed. The industry has been built in the old-fashioned Chinese way, with lots of debt, under tight government control, and in a fast and furious fashion. Rapid growth can easily lead to problems. Investment growth accounted for a record 92 per cent of China's GDP growth in 2009. Much of it went to white elephant projects like the high-speed rail system. Easy money has sown the seeds for inflation and bad debt. Consumer prices rose 6.4 percent in June. The possible collapse of the property market and explosion of local government debt now threaten to derail the world's second-largest economy.
China's debt-financed investment boom is running out of steam. The Railway Ministry failed to fully sell its $3 billion bill offering in July, as investors became more nervous about its bloated balance sheet. The ministry's total debt soared by 45 per cent in 2010 to $300 billion, accounting for 57 per cent of its assets. China's overall banking system has also become dangerously big. Assets at Chinese banks now total $14.6 trillion, equalling all the other 42 emerging markets combined, according to Fitch. Corruption is another problem of the tightly managed system. Three top rail officials are now under investigation, including the former minister who led the investment drive. After the train crash, authorities quickly responded by sacking three railway officials in Shanghai, but anger has risen over reports of the ministry burying parts of the wrecked trains near the site. The train tragedy shows that political and social risks run high when China fails to bring the economy to a soft landing.