China's debt-ridden Railway Ministry to set up PE fund
China’s Ministry of Railways will set up a private equity fund to support the expansion of the rail network, 21st Century Business Herald reported, citing a source familiar with the situation. The vehicle could raise up to RMB100 billion ($15.7 billion) from banks, insurance companies and the National Council for Social Security Fund.
The move is perhaps unsurprising given the extent of the scandal-hit ministry's money problems. According to The Wall Street Journal, construction has been halted on more than 9,600 kilometers of railway - half of it high-speed lines - in response to funding shortages.
In February, Liu Zhijun, China's minister of railways since 2003, was removed from his post for "severe disciplinary violations," thought to be tied to a corruption probe. One month later, investigators found evidence that nearly $30 million in funds intended for the Beijing-Shanghai high-speed rail line had been misappropriated in 2010. Liu had overseen a rapid expansion in the country's high-speed rail network, which covered 8,358 km by the end of 2010 and is expected to top 16,000 km by 2015. Construction spending is expected to reach $130 billion this year.
The situation sparked questions about the long-term viability of these rail development plans from both a financial and a safety perspective. These concerns transformed into public outrage in July as 40 people were killed and nearly 200 injured after two trains collided on a high-speed line near Wenzhou. The accident, combined with a tightening monetary environment in China, has seen funds for rail projects dry up.
The Ministry of Railways issued RMB20 billion in short-term commercial paper in August, the fourth such issuance of the year, despite reports that China might scale back rail development plans. Last week the ministry sold a further RMB20 billion in bonds. The National Development and Reform Commission has also announced that it will halve the 25% income tax levied on the coupon earnings of bonds issued by the ministry between 2011 and 2013.
At the end of June, the ministry outstanding debt rose to RMB2.1 trillion, up from RMB1.98 trillion at the end of the first quarter.
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