China is speeding toward a US$1 trillion black hole

China’s space-age-style rail revolution has become a symbol of state power. Beijing considers the 30,000-mile, or more than 48,000-kilometer, high-speed network one of the great modern wonders of the world as it crisscrosses the country. 

But beneath the tracks lies a darker secret. A US$1 trillion black hole of debt has opened up, threatening the very existence of the transport heavyweight China Railway Corporation. As The Wall Street Journal cautioned last week, it has become a “giant money pit.” 

Yet the warning signals have been flashing red for years. “Having the world’s largest high-speed rail network with a low transportation density is indicative of significant financial risk,” the Beijing-based Caixin media group reported in 2019.

“The ongoing construction of such a large high-speed network may place a greater debt burden on China Railway Corp [which runs the network] and local governments, making it a “gray rhino” or obvious threat to the Chinese economy,” Caixin stressed.

The fallout has hit the high-speed rail network.

Fast train to ruin:

• The dangers are real, with China’s economy engulfed in a crumbling property sector, shrinking consumer spending, and stagnating wages.
• Rising unemployment among the young and soaring local government debt has only added to the challenges facing the ruling Communist Party.

Delve deeper: China is rolling out hundreds of billions of dollars in duct tape to hold together a broken economic model. Super-sized stimulus measures are in the works to paper over cracks, which have been left to deepen in the past 20 years.

Between the lines: The fallout has hit the high-speed rail network. Ticket prices have been “raised on major routes, with “premium seats” introduced to “chip away” at runaway debt.

Big picture: “‘Trophy projects’ such as new routes and stations in rural communities are diverting resources from the social safety net, leaving many Chinese ‘feeling poorer and their futures less secure,’ the WSJ wrote,” according to a report by Semafor.

China Factor comment: As the nation’s population declines, “gray rhino” events will pop up despite China’s opaque political system. In 2011, a high-speed train crash in Zhejiang province killed 38 people amid allegations of a cover-up. The truth trickled out.