7/28/2011 5:31 PM ET|
China's deadly wake-up call
Did China’s high-speed trains get so fast by cutting corners on safety? The recent 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.
7 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 that 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 that the government will find scapegoats. But everyone thinks 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 in as the solution to this disaster.
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 that this is 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 kilometer 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 feeings about 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.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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Misinformed article. The accident has nothing to do with the new High Speed Line between Beijing and Shanghai, instead it took place at a railway between Zhejiang and Fujian. Moreover, the trains involved in the accident are not the high speed train referred to by the author in article. The accident has little to do with the high speed train patent dispute.
Japanese high speed train is not accident free and zero death in its history as claimed by the author . A disastrous accident of Japanese high speed train killing over 100 passengers just happened a couple of years ago. The author should at least google the facts before putting it in writing.
Your facts and sources are incorrect. Contrary to your report, the July 23rd train crash did NOT occur on the newly opened Shanghai - Beijing line. The crash occured on a totally different line close to the city of Wenzhou, which is coupld hundred kilometers south of Shanghai. That is a big error. It did not occur on the S-B line and therefore did not occur "on exactly this segment of the system". The credibiltiy of your remaining statements are now suspect....
His facts are wrong, and that highlights his intention here isn't to write a serious article about China's economy but an inflammatory article to spark emotional reaction.
He's writing a money article.
Exactly how is it emotionally driven?
All the points relate back to economics and investment.
1) It's not even disputable that other high speed rails around the world are safer. If you're saying otherwise (then indeed, google and fact check). China has been plagued with problems on almost *all* it's highspeed lines. Whether that's repeated accidents, power failures, or simply not making any money.
(It should be obvious that a government that *doesn't* have to fix anything on behalf of its people would have less safety. Unlike other countries [even with corrupt governments] because at some level, the government has to respond to people in Japan, France, etc.)
2) The Export implications are all over. You may be in China, why don't you read what people who buy the potential exports are saying quote "China's bullet trains have 0 credibility as an export"
3) The high speed rail network in China is bankrupt and survives on loans. It doesn't even generate enough revenue (let alone profit) to repay *interest* on the loans used to build it. Let alone repay the principal.
This massive investment does little to service China's middle/lower class. In fact, it's one of those mistakes China continues to make. Invest money after bad.
A huge amount of the infrastructure investment China is making has 0 returns (or even negative returns). What a waste of soveriegn wealth. But it happens because a lot of people stand to get rich. Politicians, Contractors, the top 10% of their society.
The growth rates aren't necessarily the problem, its where they reinvest it (or don't reinvest it).
1. They have ignored their environment. They have such a huge environmental disaster to clean up it will take decades and billions of Yuan. 2. They have artificially pegged their currency to others. They will have to let it float sooner or latter. By waiting they are exasperating the problem all in the name of growth. 3. And most significantly is their one child policy. Since their birth rate was so high prior to 1981 (6 children per female) and so low now (1.6 children per female) they have a huge boomer generation of their own. Without kids hanging around to soak up resources, the Chinese have been able to direct those savings towards growth.
The piper must be paid sooner or latter, as we learning (US). The Chinese are going to have a harder lesson than even us unfortunately.
I have always liked Jubak, but I am going to take his writing with a grain of salt after this. His facts are wrong, and that highlights his intention here isn't to write a serious article about China's economy but an inflammatory article to spark emotional reaction.
Disappointing Jubak. I have been going to China for 25 years, and go about 6 times a year. The Chinese are fed up with their government and they didn't elect their leaders. We elect our leaders and there is a (semi) clear way for every individual to run for office and we still struggle. To categorize every tragedy or misfortune in China as a wake up call to their population about the governments woes is naive - they don't need a wake up call. They recognize it. But they also recognize that our freedoms can lead to negative excess too - look at Norway's recent mass shooting. And now the almost bombs at Ft Hood. Easy access to buy guns?
Its irresponsible and naive to lump people into buckets like this. They are people, trying to make money, feed their families, and get through the system. Just like people everywhere.
hmm... I am in CHina now and I see no signs of the debate being quashed by the government. Quite the opposite. It is all over the news!
Now, excuse me as I go read today's reason for the market climb / fall in the other articles.
If you changed China to US, and changed the name of the towns, then you wouldn't know the difference.China is the US on steroids when it comes to corruption, wealth entitlement, etc.
The Laws here give some obstacles to government and business just doing whatever the hell they want. That's not the case in China. When's the last time the US gov told you how many children you could have?
If China is the future, it's a sad one with little rights. (What's even worse is the developed world is bending to their ideas, instead of the developing world becoming for social. i.e. lowering wages, lowering social services, lowering environmental standards, etc. Meanwhile countries like China and India do little to expand social services, environmental standards, or wages. Looks like the world lost to me.)
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