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Railways holding firm, float mulled

By Mao Lijun and Zheng Lifei (China Daily)
Updated: 2009-06-25 08:15

China's Ministry of Railways is planning to package one of its most valuable railway line assets into a holding company and then float its shares to the public in a bid to raise capital to fund the country's frantic railway building boom.

The ministry also plans to inject the assets of the 220 billion yuan Beijing-Shanghai high-speed rail, to be operational next year, into the company after the proposed vehicle goes public.

The plan, which is still in the very early stages, calls for restructuring of the 300 billion yuan worth of assets of the Beijing-Shanghai railway with the aim of listing it in future, two people with knowledge of the matter said.

The ministry has two proposals on the matter, one of them said.

One proposal relates to the three railway bureaus under the ministry, namely Beijing Railways Bureau, Shanghai Railways Bureau and Jinan Railways Bureau -- all of which have assets related to the Beijing-Shanghai railway -- jointly setting up a holding and joint stocks company and putting their relevant assets into the special purpose vehicle.

Restructuring of the Beijing-Shanghai rail will be a major breakthrough in the reform of China's railway system, experts say. Zhao Jun

The other plan is for the ministry to invite interested institutional investors to set up an investment vehicle with the three railway bureaus, modeled after the structure of the management company of the Beijing-Shanghai high-speed rail, in which the ministry would hold a majority stake. The country's pension fund, local governments and the nation's second biggest insurer Ping An would take the remaining stake, as per the proposal.

"The ministry has not yet decided which proposal is feasible," the person said.

Financial institutions, such as insurance companies and banks, would be potential and preferential investors, but the person did not say whether foreign institutions would be welcome to join in the program.

The 21st Century Business Herald reported on Monday that the railways ministry had once planned to list the Beijing-Shanghai high-speed railway separately.

"But the ministry may have killed the idea as it may take many more years to have it listed due to regulatory requirements," the people said.

According to the country's securities rules, companies seeking domestic listings are required to be profitable for at least three years prior to the listing.

The planned company will eventually take the 1,318-km Beijing-Shanghai high-speed railway, which is still under construction, under its wing by buying out its assets after the company itself goes public.

In order to improve asset quality in the proposed holding company, the source told China Daily that the ministry is considering spinning off some of the under-performing assets, such as the freight transportation business, from the Beijing-Shanghai railway asset portfolio that it plans to inject into the new company.

"Such a move is designed to make it more attractive to potential investors," the two sources said.

The Beijing-Shanghai railway, linking the two wealthiest cities in the country, is the most valuable rail asset the ministry has.

The railway, the busiest line in China, accounts for about 10 percent of the nation's total rail passenger transport volume.

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The under-construction high-speed Beijing-Shanghai rail link is expected to double the transportation capacity the current regular line carries, to 80 million passengers each year, while shortening travel time to about five hours, with a peak speed of 350 km, according to the project plan.

The asset restructuring and capital-raising plan, the people said, was still at a very early stage and the authority has not yet set any timetable for the massive scheme.

The scheme, if successful, would be the most sweeping and ambitious restructuring and reform attempt it makes in its railway financing front, analysts said.

The move, analysts and experts said, could be a major breakthrough and could help alleviate the capital shortage the country faces in its frantic push to expand its rail networks to cope with rising demand.

"It is a major step forward in the reform of China's rail system but it will certainly take some time for the plan to materialize," said Li Chao, a rail analyst with China Jianyin Investment Securities Co.

"But it is hard to predict how much capital it can raise from such a plan because the details are too sketchy," the analyst said.

The central and local governments are the only financiers of railway projects and the tools they can use to pool capital are debt-financing instruments, such as bond issuance and bank loans.