Patrick Chovanec: China’s High-speed Rail Dilemma
The theory is that building a national high-speed rail network will put all that passenger traffic on “the fast track,” as it were, and open up capacity on the existing rail network to move not only more coal but also other types of goods, thus relieving the road backups and boosting both productivity and regional development.
The problem is that high-speed rail is expensive both to build and to operate, requiring high ticket prices to break even. The bulk of the long-distance passenger traffic, especially during the peak holiday periods, is migrant workers for whom the opportunity cost of time is relatively low. Even if they could afford a high-speed train ticket — which is doubtful given their limited incomes — they would probably prefer to conserve their cash and take a slower, cheaper train. If that proves true, the new high-speed lines will only incur losses while providing little or no relief to the existing transportation network.
China Economic Review: Closing the Gap Between China’s Coast and Interior
China has attracted worldwide attention with its ambitious plans to ferry passengers across the country in trains running on ultra-modern high-speed rail lines, freeing up existing capacity to handle other goods. A better, if less glamorous, approach is to develop the country’s intermodal freight network.
This was a long comment in response to Patrick’s excellent article and blog post discussing the merits of investing in intermodel freight vs. a passenger-focused high-speed rail network.
Hi Patrick, I enjoy reading your blog and hearing your perspective on China. I wanted to respond with some of my own thoughts on your recent post.
I’ll start by rehashing stuff I am sure you have heard before but its important background into the way I am going about thinking about this. First, I’ll state my view up front – over the long run, I believe that building out the rail network (including HSR) as part of an integrated transportation system will provide substantial net benefit to Chinese society as a whole. The arguments for this are both general and specific to China as contrasted with the US (and to a lesser extent Europe).
I think we can agree that an efficient rail network in general provides network externalities to overall society. This includes:
Reduction in the need for personal cars – benefits particularly the lower and middle class
Reduction in road congestion – fewer cars needed for city-dwellers will significantly relieve congestion in the cities and on the highways
Reduction in the reliance on imported oil – China has fewer oil reserves than the US (and more people) and relies (increasingly) more heavily on imports
More efficient people movement – unlike highway networks, rail can be scaled more reliably than the road network
Improvement in the freight network – slower freight can use existing capacity currently released by slower passenger rail
There are also second-order effects of increasing the intensity of urbanization, and connecting people and their ideas, that have proven to create wealth (at least as measured by output). It is not easy to put a precise number on the magnitude of these network externalities, but I think it is reasonable to assume that it is (i) positive and (ii) quite large … and ultimately reflected in broad quality of life measures (though not necessarily financial returns).
Therefore, I do not think you should look only at near-term financial returns on high-speed rail because they may not capture these externalities. Or even those over the next ten years – history has shown that rail infrastructure is an exceptionally long-term investment (in the US, we are still using track, much of which was built a hundred or more years ago). America’s great railroad building boom ended in bust for many financial investors, contributed to several large recessions/depressions but I would say over the last 150 years they have delivered a huge net benefit to America – and continue to do so. I recognize that you are not debating against the merits of rail in general, but on the benefit of incremental investment in rail (particularly of the HSR variety), but I think it is also important to give full consideration to these positive externalities.
So onto the question of whether this incremental investment in rail infrastructure is the best use of capital which is what you were really focused on.
While it may be true that the majority of Chinese consumers today would consider HSR to be a luxury out of their reach, given the relatively high rates of household income growth most expect, there will be millions of more people, particularly in the specific corridors (Beijing-Shanghai-Hong Kong) targeted for high-speed rail, where HSR will become viable economically in a relatively quicky timeline.
These positive network externalities are enhanced by characteristics specific to China as contrasted with US and to a lesser extent, Europe:
The nature of China’s development is denser than Europe and far denser than the US. Whereas the majority of people live in suburban or low-density urban (that often would not even qualify as urban for China) in the US. There are very dense cities and dense towns and then there are rural farming areas that are sparse. These denser, more concentrated pockets of people make it easier to develop a fixed rail network that goes from urban concentration to urban concentration. Contrast this with Southern California, where thousands of square miles of low-density suburban housing makes it difficult (logically and politically) to build statio stops. I would further contrast this with my dad’s situation – retired and spending the winter months in Southern China in the “countryside” … xiang xia … and he lives in a 15-story apartment building just as tall as mine in downtown NYC and does not need an automobile to get around.
China still has a significant amount of under-utilized labor. While labor is not the only cost component, it is a significant portion of the total construction costs. The alternative for many for these labourers would be non-productive rural – despite all of its progres in the last 20-30 years, China still has excess labour of this variety – particularly when certain export industries tanked in late 2008. From a comparative perspective, in the US diverting resources into HSR would take people out of more productive activity.
On the commodities and materials costs involved (steel, industrial machinery etc.), I would argue that accelerating the timetable for rail buildout when the developed economies slowed down (as they did starting in 2007) means that they are taking advantage of a period of lower demand for those commodities. Which means they may just be cheaper than ten, twenty years from now when (i) the developed countries have worked their way out of the suppressed growth and (ii) India and other rapidly growing developing countries are also hungry for those commodities.
As you know, China is in the middle of rapid development and change. The implication of this is that it will be a lot cheaper for China to built out its rail network today than in the future when people are wealthier and society is more built up (less to rip up). Cheaper in terms of both absolute labor costs as discussed above, but also in terms of moving people and infrastructure out of the way of rail lines because they need to be straight. I do not want to get into a human rights debate – e.g. the morality of asking peasants to “move out of the way” – it is about the relative difference between today and tomorrow – and I know that it is a lot less inconvenient to ask someone to move today than it will be in a more developed economy tomorrow. Contrast this with the US and Europe – regardless of whether it happens today or twenty years from now, I know it will be very expensive in either case to acquire land rights to build rail in the US so there is less of a benefit to accelerate the process.
Your article discussed that HSR does not fulfill its “original intent” of relieving congestion on the existing rail system. Also you speculated that it was the “glitzy” nature of HSR that drove government planners. I am not sure whether that was the only intent of the planners in central government or whether they are doing it for vanity – where are you getting that from?
To me, this was merely the acceleration of existing plans (in an economic downdraft, when costs are lower and resources more available) to continue the process of upgrading China’s overall transportation infrastructure that has been going on for quite some time now. Ultimately, given its sheer size and density, China’s transportation will inevitably rely on all forms – cars, buses, planes and trains and the logistics-related infrastructure (such as intermodal facilities that you mention) required to connect all of them.
The key point is that they are heavily investing in all of these areas. I cannot comment on the relative benefit of incremental benefit of taking away some HSR investment to put more into intermodal as you suggest – I think they just said to heck with it, we have excess labour so why not just do more of everything. There will inevitably be things like waste, bad decisions and corruption to squeeze efficiencies out of the resource allocation process, but in the end the positives outweigh the negatives.
In a follow-up to another comment:
In my other comment, I list out some of the other positive externalities of expanding the rail network, but let’s just focus on the very measurable benefit of time saved for now and then layer on some perspective on the overall cost of the project.
Look, we all know the cliche that time is money. Today, time is less valuable in China because their incomes are lower. But tomorrow, as incomes rise, time saved will just get more valuable. The long-term nature of rail systems means that future, presumably wealthier generations will reap the same real benefits of HSR (in terms of time saved) for years to come.
The crux of Patrick’s article is whether there are alternate ways to create value that make more economic sense today. I argue in another comment that upgrading the rail network makes sense, though I would agree that it needs to be alongside improvements in other transportation options (such as intermodel logistics which he focuses on). China’s sheer size generally makes it imperative to attack such large and complex challenges on multiple problems.
(It’s kind of like arguing whether you focus on wind vs. solar vs. higher efficiency to reduce America’s dependence on oil – it’s missing the key point which is that to solve such a large problem you need to implement an entire array of different approaches).
On this cost-benefit question, let’s put some things in perspective. The 968 km Guangzhou to Wuhan line cost about 117 billion RMB. This is roughly the same cost in USD ($17 billion) as the proposed 14km long 2nd avenue Subway in New York City and slightly more than the $15 billion 345 km high speed rail from Taipei to Kaohsiung in Taiwan. So I would say it is not as expensive as you might think.
Moreover, usage of the Guangzhou-Wuhan line has actually been greater than originally modeled, which suggests that more people can afford it than you might think.
Note
Edit: I removed the following paragraph from my original comment:
This article (The Transport Politic: High-Speed Rail in China) makes an important point which is that the actual track for HSR and “normal speed” rail are the same, so HSR primarily entails additional investments in more expensive rolling stock, not track itself. The rail itself, whether it can support normal trains or HSR, does not represent a major change. I am not a civil engineer by training but this makes sense to me
With the benefit of hindsight, this statement should be clarified. While the rail gauge was the same, the vast majority of investment in high-speed rail was building overhead viaducts, building tunnels and raising bridges so that the track could be as straight as possible, allowing the train to be safely propelled at 200+ km/hr.
This was originally posted here in January 2011.