China will allow foreign companies to enter into joint ventures in the domestic railway cargo market from this year to 2003 as a first step towards totally opening the business.

But Chinese firms will hold a majority stake in all such joint ventures during this initial period, sources with the Ministry of Railways said.

Foreign companies will be allowed to control a majority of shares in these joint ventures from 2004 to 2006, the ministry said.

After 2006, all restrictions imposed on foreign firms will be lifted and all companies will compete in a fair and open market.

The plan follows China's promise to open the market to foreign companies after joining the World Trade Organization (WTO).

Currently, railway transportation is one of the most tightly controlled sectors in China. The ministry has had a monopoly over the business for five decades.

Different from the cargo business, railway passenger transportation will not be affected by the WTO entry.

Railway Minister Fu Zhihuan said the ministry would separate the cargo and passenger transportation operations as soon as possible in preparation for opening the cargo division to foreign investors, with the restrictions specified for the five-year buffer period.

Analysts say the industry must loosen restrictions on market access blocking non-State investors if it hopes to increase its profitability.

The industry saw its first year of loss-free operation in 1999 and made a profit of 500 million yuan (US$60 million) in 2000 through service improvements.

But the ministry itself lacks adequate mechanisms to stimulate competition among its directly controlled companies.

The problems are compounded by increasing competition from the highway and aviation sectors, and the railway industry has operated with financial deficits for years.

The urgent need for reforms has been long recognized.

Fu said reform would be based on a programme to separate ownership and management over the next four years.

He said his ministry would retain ownership of railways and would open the transportation business to non-State investors, especially in some well-developed regions.

"The railway will become a platform that all parties can use if they have the necessary abilities," the minister said. But he did not disclose the specifics of the programme.

Fu also said foreign investment would be welcomed in railway construction.

The industry badly needs more funds to lay more tracks because current transportation capabilities are far from satisfying domestic needs.

However, few foreign investors have been attracted as the return on investment in railway construction requires a long-term commitment.

The ministry plans to choose several profitable railway lines for international bidding in the near future, including one from Northeast China's Heilongjiang Province to Yantai, a port city in East China's Shandong Province.

Trains will be shipped from Dalian in Northeast China's Liaoning Province to Yantai, from whence they will travel on to destinations in East China. The line is expected to cut nearly 1,000 kilometres from present routes which have to detour through Beijing and Tianjin in North China.

The ministry said foreign investors would likely enjoy profits in the first 22 years of operation before the State reclaims the railway.

In another move to increase internal competition and operational efficiency, the ministry has established five local bureaux including those in Beijing and Shanghai to compete on some busy existing routes, such as those linking Beijing, Shanghai and Guangzhou.

The bureaux will be allowed to compete with one another.