China’s Deadly Wakeup Call

07/29/2011 9:00 am EST


Jim Jubak

Founder and Editor,

Did China’s high-speed trains get so fast by cutting corners on safety? The wreck is becoming a potent symbol for those who believe China is growing too fast for its own good.

The recent collision of two high-speed trains in China that left at least 39 people dead is quickly becoming a symbol for many Chinese of all that’s wrong with China’s government and economy―even if Beijing has cracked down on any public discussion of the event. The government’s central propaganda department has decreed that the theme of all reporting should be “in the face of great tragedy there is great love.”

If you want to understand the tensions in the Chinese system of government and development that might put a knot in straight-line growth projections for China’s future, spend a minute studying the way this event is rippling across China.

On July 23, a high-speed train on the newly opened Beijing-Shanghai line crashed into the rear of another high-speed train that had stopped after losing power. The first four cars of the moving train fell off a bridge, and the last two cars of the stopped train derailed. At least 39 people died and 190 were injured.

Seven Worrisome Ripples

Ripple 1: Nobody Believes the Government’s Explanation

The government says that the wreck was a result of lightning hitting the first train and knocking out power. Experts on the signaling system used on China’s high-speed rail lines say that the second train would have received a stop signal even if lightning had knocked out power to the first train. Experts such as Sun Zhang of the Urban Mass Transit Railway Research Institute told news service Caixin that at least three or four redundant safety mechanisms kick in if a train stalls.

Ripple 2: Everyone Believes the Government Investigation Will Be a Whitewash

The government wants to make the problem go away as quickly as possible. Less than 24 hours after the wreck, rumors were flying across the Internet that government construction crews had moved in to bury wrecked train carriages near the track. A widely viewed online video seems to show bodies falling out of those train cars. A photograph taken on July 25 at the wreck site shows that the cars had not been buried. But nobody posting on the Internet believes the government’s explanation that the cars were merely being moved―and not actually buried―so that workers could get access to the rest of the wreck site.

Ripple 3: Everyone Believes the Government Will Find Scapegoats

But they think that those truly responsible won’t really be punished. Could Beijing have handled this any worse so far? I don’t see how. The government has removed three railway officials from their jobs―Long Jing (head of the Shanghai Railway Bureau), Li Jia (head of the Shanghai Railway Bureau committee of the Communist Party), and He Shengli (deputy chief of the Bureau). This might have been effective, except that to replace Long Jing, Beijing appointed An Lusheng. He was demoted in 2008 after China’s biggest rail disaster―when two trains collided in Shandong province, killing 71. He was back in his old job within two years and now has been brought as the solution to this disaster.

NEXT: Did China Cut Corners on Its Railway Projects?


Ripple 4: You Can Cut the Cynicism with a Spoon

Somebody got rich, and somebody else died. What’s new? In February, Liu Zhijun, China’s railway minister, the subject of an investigation into corruption, was removed from his job. In March, a government audit showed that about $30 million had been embezzled from the Beijing-to-Shanghai portion of the high-speed rail network. (The wreck took place on exactly this segment of the system.)

The common belief is these are almost certainly just the tip of a mountain of profits that went to contractors who cut corners on projects or padded costs and to land developers who got sweet deals on real estate near the new high-speed train stations. A lot of Chinese believe that who you know, who your relatives are, and how much clout you (or your parents) have in the party determine who gets rich in today’s China. This wreck feeds into those beliefs.

Ripple 5: China the Innovator Took a Big Hit

Before the wreck, China and Japan were engaged in a heated “discussion” over who owned the patents to high-speed rail technology. In June, China filed 21 international patents for its high-speed rail technology claiming that it had taken earlier high-speed rail technology for foreign partners and “adopted it, digested it, absorbed it and innovated based on it, transforming a 250-kilmeter per hour train into a 350 kilometer per hour train” in the words of He Huawu, the chief engineer of China’s Ministry of Railways.

The rejoinder from Japanese and German makers of high-speed trains was that it looked to them as if China hadn’t achieved higher speeds by innovating but by cutting corners on safety. That argument looks a lot stronger after the wreck when so many pundits are comparing the zero passenger-death record in the 47-year history of Japan’s high-speed Shinkansen system to the record of China’s 4-year old high-speed rail system.

Forget about putting a damper on Chinese exports of its high-speed rail equipment. This wreck casts doubt on China’s strategy of moving up the technology value chain.

Ripple 6: More Bad Debt

China’s Ministry of Railways showed just 15 million yuan ($2.3 million) in profits for 2010 on revenue of 686 billion yuan. Cash flow from operations came to 157 billion yuan compared with 150 billion in interest due and redemption of maturing debt. And 2010 was a better year than 2011 when debt repayment plus interest is projected to hit 250 billion yuan with cash flow from operations at 200 billion yuan.

Those figures are all from before the wreck, of course. But at least the ministry can borrow from the government. That’s not true for the real-estate developers who have staked billions of yuan on projects linked to new high-speed rail stations. If those stations are canceled or delayed as part of the government’s rethink of the country’s high-speed rail system, or if traffic through those stations is lower than expected, then developers will book big losses. That’s a big deal for a sector that’s already overextended and worried about a falling supply of new loans.

Ripple 7: The Wreck Feeds into a Very Important Current Debate

China’s leaders are debating the speed limits of sustainable growth. Before the wreck, China’s leaders, most prominently Premier Wen Jiabao, spoke of the need to balance growth with slower inflation, with better education and health care, and with rising incomes for lower-paid migrant workers. The argument was abstract when built on statistics or vague when built on people’s feel for the quality of their own lives. But now, the country has a ready-made and all-too-vivid symbol of what happens when an economy tries to grow too fast―it comes off the tracks.

Don’t underestimate the power of an image to change the debate in China.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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