Rail merger threatened by insider trading allegations

Railway giants' stocks surge on merger announcement

CSR Corp displays their products at Modern Railways Exhibition in Beijing on Oct 28, 2014.[Photo/CFP]

The stock prices of CNR Corp and CSR Corp, China's two railway vehicle manufacturers, surged by the daily limit of 10 percent on the Shanghai stock exchange on the morning of Dec 31.

Trading in their shares resumed on Dec 31 following the announcement one day earlier that they will merge into one conglomerate.

The merger comes after two months of government review and preparation, officially ending an era in which the companies often cut into each other's profit in the global market.

Wang Mengshu, an academic at the Chinese Academy of Engineering and an ardent supporter of the move, said the domestic market for high-speed trains is quite saturated, so the merger will prevent unhealthy price competition in the world market.

"The new group will have a clear edge over global rivals by being able to optimize the two rail product manufacturers' technological edges, human capital and production capacity," said Wang.

CSR will issue shares to CNR's shareholders to complete the merger.

Over the last three years, CNR and CSR often found themselves competing against each other for overseas orders, including a contract to build a high-speed rail line connecting Turkey's two largest cities (won by CSR) and the largest export contract of mainline passenger trains to Argentina (won by CNR).

Though the Chinese train makers were rarely underbid by competitors from Germany, France, Canada and Japan, they often had to battle each other with lower prices to win international contracts.

"As the Chinese economy has entered a 'new normal', the central government is eager to create bigger international brands from its high-end industries such as rail products and communications to maintain quality growth," said Zhang Ji, director-general of the department of foreign trade at the Ministry of Commerce.

"New normal" refers to economic conditions in China that differ from the former high-growth period. The trade volume of China's rail products, telecommunication and power equipment grew 10 percent year-on-year between January and November, according to the latest customs data.

Feng Hao, a rail transportation researcher at the National Development and Reform Commission, said China is also hoping to upgrade the strength of its industrial chain through this merger.

"The amalgamation can be a practical way to aid the further development of China's electronic, electrical, mechanical and materials industries," said Feng.

However, Feng said a lot of work still lies ahead on various aspects of this deal, such as sorting out duplication of construction operations and other overcapacity, as well as avoiding monopolistic activities.