By BRIAN SPEGELE And BOB DAVIS
BEIJING–A high-speed train from Beijing is scheduled to glide into Shanghai's Hongqiao railway station on Thursday after its inaugural run, an event meant to showcase China's technological prowess but one that lately has become part of a national debate about the pitfalls of megainvestment projects.
Admirers of the $300 billion high-speed rail network—likened by some to the U.S. Apollo moon project—argue that it will spread economic development farther west. By slashing travel time between Chinese cities it will spur trade and ease the flow of people and ideas, its proponents say. Construction, commodities and tourism industries are all tipped as big winners.
China's 300km-an-hour (186 mph) train makes its public debut amid questions about whether the $34 billion system will ever make a profit. Video courtesy of Reuters.
Detractors focus on corruption and safety problems that have lately tarnished the project's image. Pricey tickets, they say, underscore China's already huge rich-poor gap—and doom the trains to run half-empty, straining the national budget for years to come. These worries, as well as the environmental impact of tearing up countryside for new rail tracks, have already forced the Railways Ministry to reduce the speed of the trains and halt work on some lines.
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"Physically, they are good assets," says Ding Yuan, an accounting professor at China Europe International Business School in Shanghai. "Financially, they are all black holes."
More broadly, the high-speed rail problems underscore the shortcomings of a growth strategy that depends ever more heavily on investment in projects whose economic payoffs are uncertain.
Economists argue that China's continued reliance on investment is bound to delay a needed remaking of the economy so it relies more on domestic consumption and service industries. China's leaders have made that economic transition a priority since at least 2007 but have made scant progress. Investment amounted to 49% of China's GDP in 2010, compared to 42% in 2007. During that time, employment grew by about 1% a year, as capital-intensive industries got favored treatment.
A recent test run of the 1,300 kilometer line had the atmosphere of a shuttle launch, with Chinese journalists flashing peace and thumbs-up signs in front of the train's digital speedometers. TV camera crews placed glasses of water on seat tray tables in an ad hoc test of the line's sophisticated engineering as the train raced south through eastern China's urban sprawl. It passed half-finished apartment towers and expressways under construction. Gleaming railway stations along the line were quiet and largely empty, built in anticipation that high-speed rail will soon criss-cross the country.
As she queues for a ticket at Shanghai's Hongqiao train station, Tan Fenfen, a 26-year-old migrant worker from the eastern province of Jiangsu, grumbles that the new trains are meant for the wealthy only. She was happy with the old diesel trains with their spartan but clean carriages. "It's at least double the price compared to before," she says.
Compare the lengths of high-speed railway networks.
In 2004, China's State Council, the country's highest governing body, approved a 12,000-kilometer (7,200 mile) high-speed rail system to weave together major Chinese cities by 2020. Leaders revised that plan in 2008 to reach 16,000 kilometers. Local politicians saw a winner and proposed to build their own high-speed branch lines to the network to connect outlying cities. The World Bank is financing $800 million in track equipment, arguing that trains traveling at speeds of at least 250 kilometers an hour (150 mph) provide a "competitive advantage" over airlines for trips of less than 750 kilometers (450 miles). China has a surfeit of big cities well within that distance from one another.
With the global financial crisis of 2008, however, China's leaders turned the project into part of its economic stimulus plan, speeding up construction for many lines, including moving up the completion of the $33 billion Beijing-Shanghai route by a year.
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People look at a route map at the New Nanjing South railway station, the biggest in Asia.
The National Development and Reform Commission—the old State Planning commission which oversees everything from vegetable plantings to dam construction—has only a few dozen people assigned to its transportation oversight team, say consultants on the project, and rubber stamped projects endorsed by government research institutes, accelerating construction for new lines despite the risks of deeper debt. The Ministry of Railways and the NDRC did not respond to requests for comment.
Railways Minister Liu Zhijun proselytized for high-speed rail, telling leaders from Hubei province in January that they needed to "seize the rare opportunity to accelerate the development of the railway," according to a Railways Ministry report.
"It was a beautiful coincidence," says John Scales, a transport specialist at the World Bank's Beijing office. "They got the green light to build like crazy, and this was a minister eager to build."
But problems surfaced. Suppliers complain that the Railways Ministry hired unqualified construction workers and purchased substandard cement. Contractors cut corners to meet tight deadlines. "Over the past two years, the Railways Ministry has been pressing us really hard on orders," said a railway contractor in Tianjin, who only gave his family name, Yao. "It leaves us much less production time compared with previously."
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At the same time, dissatisfaction rose among ordinary Chinese, who were already angry over costly tolls on highways. "All public resources are going toward high-income groups," one user of Sina Weibo, the country's most active microblogging site, wrote recently. "It's not that we're opposed to high-speed rail. It's just that part of the country's public transport system should offer all levels of choice."
Government spending on rail projects ballooned from 155 billion yuan in 2006 ($24 billion) to a budgeted 745 billion yuan ($115 billion) in 2011, according to state-run Xinhua news agency. The ministry's debt ballooned to about 5% of GDP in the first quarter of 2011 from about 2% in 2007.
The project's flaws became painfully clear in February, when Mr. Liu was fired amid allegations that he embezzled around $30 million. Although government investigators didn't cite criticisms of the railway project, Mr. Liu's successor, Sheng Guangzu, has scaled back plans to focus on projects already under construction, rather than expansion. Railway consultants say work has been suspended on new lines, including Hubei projects the fired minister was pushing.
China's state-owned railway firms have taken a hit. China Railway Group Ltd., which designs and constructs railways and other infrastructure, reported the value of contracts booked in the first quarter was down 30% from a year ago. China Railway ConstructionCorp. reported the total value of bids for new railway projects had plunged 90% from the first quarter last year, although it partially attributed the decline to unrest in the Arab world, where it also does business.
Mr. Sheng also said he would slow top speeds on the network to 300 kilometers an hour (180 mph) from 350 kilometers an hour (210 mph) previously. Industry executives have said operating trains above 330 kilometers an hour increases risks, and track maintenance and repair costs go up sharply.
On the Beijing-Shanghai line, the ministry now will offer two types of service—one at 300 kilometers an hour and a cheaper version at 250 kilometers an hour. The cheapest tickets on the slower train will cost about .31 yuan a kilometer compared with other high-speed rail lines that charge around .47 a kilometer for the cheapest tickets, according to Morgan Stanley.
Still, those tickets are pricey for many Chinese. The cheapest ticket on the 300-kilometer-an-hour Beijing-Shanghai train costs 555 yuan ($86), or about 35% of monthly disposable per capita income for urbanites.
While the changes may ease some criticism, they could make the project's financing even more dicey by limiting revenue.
"The big question is whether we can get meaningful returns over the next 10 or 15 years [from the rail project] so it can provide positive momentum for the economy and increase the ability to pay back loans," says Peking University economist Huang Yiping.
—Yang Jie in Shanghai contributed to this article.Write to Brian Spegele at brian.spegele@wsj.com and Bob Davis at bob.davis@wsj.com
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