Properly defining the natural monopoly segments and competitive segments, and attracting social capital participation, are the keys to long-term reform.

In the first half of 2024, the China Railway Group turned a profit from a loss, and its debt level is also decreasing.

On August 31, the China Railway Group disclosed the financial settlement for the first half of 2024: operating income was 579.431 billion yuan, a year-on-year decrease of 0.22%; net profit was 1.737 billion yuan, compared to a loss of 11.086 billion yuan in the same period last year.

Particularly noteworthy is that the debt level has dropped from 66.16% last year to the current 64.55%.

The figures show that in the first half of the year, the total debt of the China Railway Group was 6.21 trillion yuan, a 1.8% increase from the same period last year; the total assets were 9.62 trillion yuan, a year-on-year increase of 4.34% — this is the first time in 10 years since the predecessor of the China Railway Group, the Railway Corporation, reached a debt ratio of 65.6% in 2015 that the debt ratio has fallen below 65%.

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Citing a person from the China Railway Group, the China Business News reported that in recent years, the China Railway Group has actively promoted equity financing, and the results of capital operations have been significant.

The continuous improvement in railway passenger and freight transportation, along with the stable cash flow brought by diversified operations, has allowed the total assets of the China Railway Group to increase significantly more than the total debt, and the debt ratio has finally decreased.

Railway reform is accelerating.

On July 21, 2024, the third plenary session of the 20th Central Committee of the Communist Party of China reviewed and approved the "Decision of the Central Committee of the Communist Party of China on Further Comprehensively Deepening Reform and Promoting Chinese-style Modernization," once again sending a signal to "promote railway system reform."

Zuo Dajie, an associate professor at the School of Transportation and Logistics of Southwest Jiaotong University and a researcher at the Transportation Public Policy Research Center, told us that the railway system is complex and huge, involving many aspects of reform.

The core link is to accurately define the natural monopoly segments and competitive segments of the railway industry, and to distinguish railway infrastructure and transportation services according to their public welfare and commercial nature, which is the "key" to further deepening comprehensive railway reform.

Standing at the node where the debt ratio has fallen back to the level of 10 years ago, what kind of process has the railway reform gone through?

What kind of development direction will there be in the future?

As the first mode of transportation for long-distance travel for most Chinese people, various reforms are concerning.

The market-oriented reform of the railway, as a huge project that affects the whole body with a single hair, has a history of about 40 years, which can be traced back to the reform and opening up.

Compared with industries such as petroleum, coal, civil aviation, and post and telecommunications, the path of railway system reform is particularly long and difficult.

Among these industries, the railway is the last to achieve the separation of government and enterprise.

The early market-oriented reform of China's railways was full of twists and turns.

As early as 1998, affected by issues such as fiscal deficits, the Ministry of Railways, which was in charge at the time, began to implement a pilot reform of the "asset management responsibility system" for railway bureaus in Liuzhou, Nanchang, Hohhot, and Kunming, decentralizing some powers to local railway bureaus, and assessing the leaders of local railway bureaus based on whether they could be self-sufficient.

At that time, China's economy was filled with the trend of "state retreat and private advance," and more and more large enterprises were trying out system reforms.

With the power, civil aviation, and telecommunications sectors successively introducing reform plans, the reform pressure on the Ministry of Railways was increasing day by day.

In 2000, the Ministry of Railways clearly proposed the "network operation separation" plan, carrying out a "network operation separation" transformation for the entire railway, separating passenger and freight transportation from the railway network.

However, the "Railway System Reform Plan" formulated by the Economic Planning Research Institute of the Ministry of Railways has never been approved by the State Council.

In 2002, when Fu Zhihuan, the then Minister of Railways, responded to the slow introduction of the reform plan, he mentioned two factors: one is that the railway transportation capacity is tight and needs national macro-control, "for example, during the Spring Festival travel rush, we can only stop some freight to ensure passenger transport, and at this time, passenger transport does not make money"; the second is that "railway is a relatively complex large system, and the reform of this system must be very careful."

At that time, China's railways had an independent railway public security, judicial, and prosecutorial system, a communication network, an education system, and a health care system.

The reform affected the whole body with a single hair, and the railway reform continued to advance slowly.

Finally, in 2013, the railway reform finally took a historic "key step."

The fourth plenary session of the first session of the 12th National People's Congress voted to pass the "Decision on the Plan for the Reform of the State Council's Institutional System and the Transformation of Functions (Draft)," approving the "Plan for the Reform of the State Council's Institutional System and the Transformation of Functions."

The plan clearly stated that the reform of the separation of government and enterprise in the railway should be implemented, the Ministry of Railways should be abolished, and the National Railway Administration and the China Railway Corporation should be established.

The 64-year-old Ministry of Railways officially exited the historical stage and was divided into three parts: one part of the enterprise function was stripped out to establish the corporation; one part belonged to the comprehensive management function, such as the formulation of planning, policies, and regulations, which was allocated to the Ministry of Transport; one part of the safety production supervision function was specifically established as the National Railway Administration, managed by the Ministry of Transport.

The following year, when the central leadership visited the China Railway Corporation, it was stated that the reform of the State Council's institutional system, the abolition of the Ministry of Railways, and the establishment of the China Railway Corporation were major measures to deepen reforms.

In the past, the railway has grasped the "key" of separating government and enterprise, and has done a lot of work in changing concepts, reforming systems, and changing mechanisms, and has achieved obvious results in reform, transformation, and development, which has a demonstrative effect on the reform of state-owned enterprises.

In 2013, the year when the railway achieved the separation of government and enterprise, the total mileage of China's railways reached 103,000 kilometers, of which the high-speed railway operation mileage reached 11,000 kilometers, ranking first in the world.

In 2017, the China Railway Corporation formulated the "three-step" strategy, that is, to complete the corporate reform according to "non-transport enterprises - railway bureaus - headquarters."

Against this background, 18 railway bureaus accelerated the pace of corporate reform.

At the end of 2017, all railway bureaus under the China Railway Corporation were restructured into group limited companies, and the corporate governance structure was basically formed, achieving a smooth transition between the old and new systems.

In 2018, the Iron General passed the equity transfer to determine the joint construction and operation of the high-speed train WiFi platform with Tencent and Geely Holding, which also became the first single mixed reform of the Iron General.

On June 18, 2019, "China National Railway Group Co., Ltd." was officially listed, marking the smooth completion of the "three-step" corporate reform of the Iron General that started in 2017, and the final leap of the Iron General restructuring was completed.

After the restructuring, the China Railway Group can participate in market competition more flexibly and has created an opportunity for promoting the shareholding reform of the company.

At the same time, the development of China's railways continues to move forward.

From 2013 to 2023, over the past 10 years, the national railway fixed asset investment was 7.7 trillion yuan, 1.9 times that of the previous decade.

The national railway business mileage increased from 98,000 kilometers to 155,000 kilometers, an increase of 58.6% over ten years, and the high-speed railway increased from 9,000 kilometers to 42,000 kilometers, an increase of 351.4%.

It also launched 65,000 China-Europe trains.

The just past 2023 has become the best year in the history of the China Railway Group's operating performance, with a total income of 1.25 trillion yuan and a net profit of 3.304 billion yuan, both breaking historical records.

China's high-speed rail has achieved a major leap from "catching up" to "leading," but the task of reform is far from over.

Zuo Dajie believes that although China's railway development is at the world's leading level, with four "world-class" levels, that is, world-class infrastructure, world-class technical equipment, world-class operation and management, and world-class staff quality, China's railway transportation has long been difficult to fully adapt to the market, with weak profitability, high pressure on principal and interest repayment, and financing channels need to be unblocked, and the level of sustainable development needs to be improved.

Looking at the debt level, as of December 31, 2023, the China Railway Group's debt was 6.13 trillion yuan, an increase of 0.33% from 6.11 trillion yuan in the same period last year, and the total assets were 9.35 trillion yuan, an increase of 1.63% year-on-year.

Due to the increase in the total assets of the China Railway Group outperforming the total debt, the debt ratio has significantly declined, from 66.38% in 2022 to 65.54% in 2023.

In the first half of 2024, the debt level continued to fall below 65%.

In the same period, the total debt of the China Railway Group was 6.21 trillion yuan, a 1.8% increase from the same period last year; the total assets were 9.62 trillion yuan, a year-on-year increase of 4.34%.

Behind the high debt is the difficulty for China's railways to "raise money," and the introduction of social capital has become necessary.

However, the railway construction investment is large, and the return on investment is insufficient, which is still an important issue in railway operation.

Taking Zhejiang Province, which opened China's first privately controlled high-speed railway, as an example, Zong Xinxiao from Zhejiang Provincial Transportation Investment Group Co., Ltd., in "Thoughts on the Problems and Strategies for the Reform and Development of Joint Venture Railways in Zhejiang Province," said that according to calculations, the operating loss of local-controlled joint venture railways in Zhejiang Province was about 1 billion yuan in 2020.

With the completion of local-controlled railways, starting from 2025, it is estimated that the average annual loss of local-controlled railways in the province will be about 5 billion yuan, and there is a trend of further expansion.

There is a large cash flow gap in the operation of existing railways controlled and wholly-owned by the province.

On July 21, 2024, the third plenary session of the 20th Central Committee of the Communist Party of China reviewed and approved the "Decision of the Central Committee of the Communist Party of China on Further Comprehensively Deepening Reform and Promoting Chinese-style Modernization," once again sending a signal to "promote railway system reform."

This programmatic document focuses on deploying major reform measures for the next five years.

It mentions that the railway industry should carry out the independent operation of natural monopoly segments and the market-oriented reform of competitive segments, and improve the regulatory system and mechanism.

How to let social capital participate more has always been the top priority of railway reform.

Zuo Dajie told us that dividing the natural monopoly segments and competitive segments is a good method to mobilize social capital participation.It is generally believed that the characteristics of the natural monopoly segment include capital intensity, long-term investment, and high market entry barriers, while the competitive segment is characterized by fast investment returns and fierce market competition.

From the perspective of the railway industry, the former includes infrastructure within the railway network, and the latter includes transportation services, etc.

Looking at the railway network, the former includes the main lines managed by the national railway group, and the latter includes local railways and urban railways.

"In the past, railways were mainly distinguished by technical attributes and investment and financing entities, divided into national railways, local railways, dedicated railways, and railway dedicated lines.

The practice over the past decade has proved that this method may not solve the problem.

The new era of railway reform must introduce a new classification dimension, dividing the railway infrastructure into a monopolistic, public welfare segment, and the transportation service into a competitive, commercial segment, so that both can find their place."

Zuo Dajie pointed out.

On the practical level, Xu Bin, the director of the research department of UBS Securities, told us that this means the reform trend of "separation of network and operation" will separate the parts of heavy assets and light assets.

"The network" is the infrastructure, which costs tens of billions or even hundreds of billions of yuan to build, making it difficult for social capital to participate; "operation" is railway operation, which can introduce multiple entities such as state-owned enterprises and private enterprises, allowing various types of capital to find their place.

Zuo Dajie analyzed that the future goals of railway reform are: first, the natural monopoly segment and the competitive segment are operated by different market entities, with the natural monopoly segment ensuring the quality of infrastructure supply, and the competitive segment undergoing market-oriented reforms, with passenger ticket prices and freight rates aligned with the market, rising and falling, with various supplies diversified to meet market demands comprehensively; second, the financing channels are unobstructed, with state-owned capital mainly deployed in the natural monopoly segment, and non-state-owned capital mainly deployed in the competitive segment; third, actively promote the shareholding reform, revitalizing the railway's existing assets.

"The return on investment in China's railways is not high enough, how to involve more social capital is a key part of railway reform."

Xu Bin believes that to improve the return on investment, first, the light asset operation segment should be separated, and second, allow the implementation of market-oriented ticket prices, revitalize the land assets along the railway and station lines.

With a reasonable return on investment, more social capital can be introduced.

China's railways are already at the world's leading level, how to maintain a leading position through deepening reform is the core proposition of the next stage.