Future of China Railways Ministry’s US$426bn debt unclear

March 11, 2013 Leave a comment

Future of China Railways Ministry’s US$426bn debt unclear

Staff Reporter

2013-03-11

China’s plan to break up its Ministry of Railways has led to concerns about the ministry’s bulging debt, which it accumulated during the rapid expansion of the railway system in recent years, the Shanghai-based First Financial Daily reports.

The Chinese government announced a restructuring plan on Mar. 10, with one of the main proposed changes being splitting up the Ministry of Railways into a State Railway Administration under the Ministry of Transportation and a state-owned enterprise that will be called China Railway Corp.

The proposed railway administration will play a managerial role at the Railways Ministry, while the state-owned company will be tasked with running railway operations, according to the government announcement.

Since the Ministry of Railways had accrued a total debt of 2.66 trillion yuan (US$426 billion), compared with its total assets of 4.3 trillion yuan (US$689 billion) at the end of September, how this debt will be paid off had become a hot topic of discussion, the newspaper said.

“This is a very important issue. As the Ministry of Railways will cease to exist, the party liable to repay the debt will be different, giving creditors the right to seek immediate repayment or even bring up subsequent litigation,” said Mao Zhenghua, a co-director at the Institute of Economic Research at Renmin University of China.

The Railways Ministry and the companies it owned have 759 billion yuan (US$121.7 billion) in outstanding bonds, the newspaper said, and borrowed 14 billion yuan (US$2.2 billion) from foreign creditors.

Although the Railways Ministry did not disclose details about its loans from Chinese banks, the newspaper estimated the figure stood at 1.4 trillion yuan (US$224 billion).

When asked about the debt issue on March 4, Railways minister Sheng Guangzu said it is an issue that needs to be studied carefully.

Mao suggested that the central government shoulder the existing debt that had mainly been accumulated during a period of rapid expansion of the network since 2008, while new funds should be sought through corporate loans and bonds.

Uncertainties surrounding the bonds issued by the Ministry of Railways have emerged in the market, such as whether the 50% capital gains tax waiver related to the bonds would remain, the newspaper said.

A researcher in fixed income at a Chinese bank said it is unlikely that existing Railways Ministry bonds would become government bonds, but they are more likely to be absorbed by the planned state-owned company, which is a view shared by Mao.

The researcher added that if the government decides not to back the existing Railways Ministry bonds, their yields might go up as a result.

Before the government plan was announced, Guangzhou-based GF Securities issued a report, saying that it expects slower growth in new investment in the railway system, which will offer a positive outlook for railway bonds if the Ministry of Railways is merged with the Ministry of Transportation.

Filed under Macro Trends

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