China to split rail ministry after scandals; China Plans Overhaul of Debt-Laden Railways; China Unveils Government Agency Shake-Up Proposal

China to split rail ministry after scandals
Posted: 10 March 2013 0930 hrs

BEIJING: China will split its scandal-plagued railways ministry in two and bring its administrative functions under the control of the transport ministry, state media said on Sunday.

The plan is to “dismantle” the ministry, the official Xinhua news agency reported, citing a report on institutional reform to be submitted to the National People’s Congress parliament meeting in Beijing later.

The ministry’s commercial functions will be taken over by a new China Railway Corporation, it added.

The railway system has been one of China’s flagship development projects in recent years and the country now boasts the world’s largest high-speed network.

But the expansion — which has cost hundreds of billions of dollars — has seen widespread allegations of corruption and former railways minister Liu Zhijun, who was sacked in 2011, is awaiting trial on graft charges.

In July 2011 a high-speed crash in the eastern city of Wenzhou killed at least 40 people, sparking a torrent of public criticism that authorities compromised safety in their rush to expand the network.Investment this year is due to reach 650 billion yuan (US$105 billion), Xinhua reported in January, up 30 percent on the 2012 budget, although actual rail investment in China usually turns out higher than the planned figure.

Beijing spends heavily on infrastructure to bolster economic growth, although senior leaders regularly speak of the need to rebalance the economy.

By the end of 2012, China had 98,000 kilometres (61,000 miles) of railway in operation, the second-longest network in the world, and the globe’s biggest high-speed rail network with 9,356 kilometres of lines, officials have said.

It includes the world’s longest high-speed rail route, a 2,298-kilometre line between Beijing and Guangzhou that whisks passengers from the capital to the southern commercial hub in just eight hours, compared with 22 previously, which opened in December.

Updated March 8, 2013, 9:15 p.m. ET

China Plans Overhaul of Debt-Laden Railways

By COLUM MURPHY

BEIJING—China signaled it is on the verge of shaking up its massive railway system, long plagued by corruption allegations and heavy debt and since a deadly 2011 train crash also under a cloud of safety concerns.

Reform of China’s Railways Ministry will start once a plan to merge it with China’s Transport Ministry is approved, said Vice Railway Minister Hu Yadong on the sidelines of China’s once-a-year legislative session.

One concern has been the that the Railway Ministry both regulates and operates the country’s railways industry, which had made for a murky structure and had impeded both competition and financing. Chinese media in recent weeks have reported that officials want to break up the ministry and move its regulatory duties to the Ministry of Transportation.

“We are confident that after the proposal gets approved, we’ll carry out the reform accordingly,” said Mr. Hu on Friday. He said the ministry’s reform plans are in line with Beijing’s broader goal of consolidating the country’s many ministries into more powerful superministries. He didn’t elaborate or disclose details.

Wang Mengshu, deputy chief engineer of state-owned construction company China Railway Group601390.SH 0.00% said Friday that reform could involve separating out railway construction and give oversight of the railway network to the Chinese regulator that manages the central government’s state-owned enterprises, the State-owned Assets Supervision and Administration Commission, or Sasac.

Shaking up the ministry would be a considerable task, but one that analysts say is necessary to keep China’s economy and transportation sector humming.

“The large railway system is critical to China’s economy—and will become even more so with the economy’s shift from coastal areas inland,” said Gerald Ollivier, senior transport specialist with the World Bank, adding that the current multiplicity of roles at the ministry creates “some conflicting objectives.”

Splitting it up into parts—which could eventually entail setting up several regional rail companies—could intensify competition and improve fundraising among Chinese rail companies, which could help reduce China’s relatively high rail costs and fuel the system’s continued build out. It could also create additional business for international companies that supply parts and know-how for China’s rail ambitions.

In 2012, China’s rail system carried 1.9 billion people—or 29% of total passenger kilometers. It carried 17% of the country’s freight expressed in freight-ton kilometers, according to national statistics. Under Beijing’s current five-year plan, the ministry also oversees annual investment of around $90 billion a year, equivalent to around 1% of China’s GDP.

China has 98,000 kilometers of railway and plans an additional 5,200 kilometers. Only the U.S. has more rail, with 228,500 kilometers, according to the World Bank. China also has ambitions to build out its high-speed rail capabilities. In October, the central government said China aims to complete the construction of its high-speed railway network stretching 18,000 kilometers by the end of 2015, nearly double its current size.

According to the China Federation of Logistics and Purchasing, transportation and logistics costs accounted for the equivalent of around 18% of GDP—double that of advanced economies. Inefficiencies related to rail such as poor interconnectivity with other transport modes contributes significantly to costs, said Tom Behrens-Sorensen, a transportation specialist with consulting firm Navisino (Beijing) Advisors Ltd. “The Chinese economy has paid a very high price in terms of transportation inefficiencies,” he said.

China’s rail build out also came at a price. As of the end of September, the Railways Ministry had debts totaling 2.66 trillion yuan ($422 billion) and a leverage ratio of 62%, its financial reports show. In the January-September period, it reported a loss of 8.54 billion yuan.

Former Railway Minister Liu Zhijun—nicknamed Great Leap Liu on account of his ambitious plan to roll out high-speed trains in China—was sacked from his post in February 2011 for what state media said was “severe violation of discipline.” State media said he helped Ding Yuxin, a chicken farmer turned businesswoman, win around 3 billion yuan (about $471 million) in contracts. Under one such arrangement, Mr. Liu walked away with a consulting fee of 10 million yuan, Xinhua said. Mr. Liu, whose case was transferred to the judiciary in January, has been unavailable for comment.

The ministry’s biggest public blow came later in 2011 when one bullet train rear-ended another in the eastern China city of Wenzhou, killing 40 people and injuring 172. The incident prompted intense public criticism of China’s breakneck growth, prompting one anchor on the official China Central Television to ask on air, “Can we ride a train that arrives safely?”

Breaking up the ministry could improve fundraising for the rail industry, after the Wenzhou crash made financing more difficult and as debt has mounted. “This will improve financial transparency and is an initial step toward leveraging capital markets,” said Patrick Xu, analyst with Barclays Bank. “This will open up the avenue to equity markets.”

Citibank analyst Paul Gong said China still needs more railway capacity.

“The pressing issue is how to fund,” he said, adding that equity is the “missing piece.” If more competition is introduced to China’s rail sector—which is seen as a long-term outcome of reform, then that too could also bring a windfall to suppliers to the railways sector. “When you set up competing [rail] companies, it will trigger greater capital expenditure as players push to buy more trains to grow market share.”

Updated March 9, 2013, 10:06 p.m. ET

China Unveils Government Agency Shake-Up Proposal

By CARLOS TEJADA

BEIJING—China plans to shake up government agencies including the organizations that oversee its contentious one-child policy and its food and drug safety, in a nod by authorities to flash points in China’s rapid growth and development.

The proposals outlined Sunday include a widely expected revamp of its troubled Ministry of Railways. China also plans to combine agencies that oversee energy policy, and regulation and censorship of print and film. It will also consolidate fishing and maritime regulation at a time when China’s fishing industry has come under scrutiny for its growth and its role in international disputes.

The proposals were outlined in a report to be delivered Sunday by State Councilor Ma Kai before the National People’s Congress, which is holding its annual two-week session in Beijing. It follows vows by China to streamline government authority by combining agencies and eliminating overlapping responsibilities. The congress typically approves the proposals set before it by senior Communist Party leaders.

The proposals include merging the commission that oversees the one-child policy with the Ministry of Health and shifting development of China’s population strategy to the National Development and Reform Commission, China’s top economic planning body. The National Population and Family Planning Commission oversees China’s one-child policy, which critics say has led to harsh local enforcement that can include forced abortions and sterilizations. Economists inside and outside the country have also warned that the one-child policy is eroding China’s labor force, hurting its long-term competitiveness.

It wasn’t clear how the move would result in changes to the policy, and Chinese Premier Wen Jiabao said in a report released at the beginning of the National People’s Congress that China would stick to its 2013 population goals. Still, the merger paves the way for an end to China’s one-child policy, said Cheng Li, a political expert at the Brookings Institution in Washington, D.C.

“This is a signal to an end of a policy that in reality is not in line with China’s other reforms,” Mr. Li said, citing government efforts to accelerate market reforms and its vow to focus on urbanization. In addition, China needs a reliable labor force that has been jeopardized by the one-child policy, Mr. Li said.

China’s top demographers and statisticians have called the policy into question in recent years, saying it is shrinking the nation’s pool of workers. The absolute size of the working population, ages 15 to 59, fell by 3.45 million people to 937 million last year, Ma Jiantang, head of China’s National Bureau of Statistics, said in a news briefing in January.

The proposals include elevating the State Administration of Food and Drugs to a general administration and combining a number of oversight responsibilities now spread around other agencies. China has struggled with food and drug safety for years, as many believe a system overloaded with overlapping bureaucracies has obscured problems and prevented effective solutions. The General Administration of Quality Supervision, Inspection and Quarantine has overseen imports and exports while commercial and industrial authorities have overseen packaging.

Industry watchers say that the reorganization, while it is still dependent on other effective changes being made, will likely produce an agency “that is capable of acting when demand from the public arises and will not be subordinate to any agency with higher or alternative priorities,” said Lester Ross, a Beijing¬based attorney with U.S. law firm WilmerHale.

Awareness of China’s food-safety issues intensified in 2008, when milk tainted with the industrial chemical melamine resulted in the death of six infants and illnesses in 300,000 others. The issue shocked the public and has spurred leaders to issue high-profile crackdowns.

The government will also establish a new energy bureau and merge the National Energy Administration and the State Electricity Regulatory Commission, according to the proposal. The new agency will be overseen by the NDRC. It comes as China looks for ways to make its economy more energy efficient and as it looks for ways to make its energy price controls more closely adhere to market price changes for oil and natural has.

It also proposed merging the regulators overseeing its publishing and its film and broadcast industries, combining the General Administration of Press and Publication with the State Administration of Radio, Film and Television.

Beijing plans to merge its maritime law-enforcement agencies into one administration under the Ministry of Land and Resources, uniting the coast guard with fisheries law-enforcement and antismuggling authorities. Those those responsibilities are now shared among different ministries.

The new authority will likely play a role in China’s increasing maritime territorial disputes with Japan and with Southeast Asian nations. Fishing boats and civilian maritime regulatory vessels have played a major role in those disputes, testing Tokyo and other nations with claims overlapping China’s in the East China and South China seas.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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