CHINA'S Ministry of Railways said this week that it expects only a "slight profit margin" from the operation of the Beijing-Shanghai high-speed railway and won't break even "in the short term."

But the ministry remains "confident and optimistic" that the new project connecting China's two most important cities will eventually become profitable, Wang Yongping, a ministry spokesman, said at a press conference in Beijing.

That glowing assessment may be too optimistic, according to Zhao Jian, a professor with Beijing Jiaotong University and a vocal opponent of China's ambitious plans to lay 16,000 kilometers of high-speed rail track nationwide by the end of 2015.

Zhao told the Hong Kong-based news weekly Yazhou Zhoukan earlier this year that the 1,318-kilometer Beijing-Shanghai line, along with many other high-speed lines connecting more sparsely populated inland regions, could lead to a "subprime-style crisis" in China.

Mountain of debt

Fanning those fears is the mountain of debt the railways ministry is amassing to pay for the elaborate infrastructure.

By the end of the first quarter, the ministry had debts of nearly 2 trillion yuan (US$309.2 billion), up from 868 billion yuan in 2008, according to its quarterly financial report.

Most of the ministry's 58.24 percent asset-liability ratio is attributed to the building of the high-speed railway network, which was part of the government's 4 trillion yuan economic stimulus package unveiled in 2008 to respond to the global economic crisis, Zhao said.

Government money was accompanied by hefty bank loans to underwrite the construction of high-speed tracks, which cost more than three times ordinary tracks, he added.

Cost blowouts have forced the ministry to borrow even more money, either from banks or from bond markets.

Take the Beijing-Shanghai line, as one example. The budget for the 24-station line has swollen from 130 billion yuan to the nearly 221 billion yuan.

The cost of a 120-kilometer line linking Beijing to Tianjin, which has been in operation since 2008, surged to 20 billion yuan from 12.3 billion yuan after the speed of trains was increased to 300 kilometers per hour from between 200 kph and 240 kph.

According to a report by the National Audit Office issued last year, nearly 66 percent, or 1.3 trillion yuan, of the debt owed by the railways ministry at the end of 2009 was long-term liability to banks and bondholders. That means continuing large sums of interest to be paid.

The ministry has issued nearly 563 billion yuan of bonds since 2006, and less than 100 billion yuan of that debt has reached maturity, auditors said.

Minsheng Bank forecast that the railway ministry will have to pay more than 100 billion yuan of interest alone every year in the next few years. That compares with the over 40 billion yuan in interest the ministry paid out in total in 2009.

Minsheng is forecasting the ministry's asset-liability ratio will balloon to 70 percent next year.

Starting from 2014, the ministry will face a peak of maturing debt, with more than 70 percent of the funds needed to realize China's high-speed railway network dream coming from borrowed money, the auditors warned.

Adding to the ministry's woes is its balance sheet. It is in the red already.

Data from the ministry showed it invested almost 607 billion yuan from January to November last year, while reporting revenue of 412 billion yuan.

Yu Bangli, chief economist of the ministry, said in an earlier interview with China Business News that the ministry's debts are still at "safe, reasonable and controllable" level.

Some people doubt that.

In a revised budget plan released after the departure of former railway minister Liu Zhijun on corruption charges, the ministry slashed its investment budget for railway construction in the next five years to 2.8 trillion yuan from 3.5 trillion yuan. Spending for this year also shrank by 14 percent to 600 billion yuan.

In a related move, the ministry has also taken steps to adopt a high-speed rail network slower than originally planned.

Maximum speed on the Beijing-Shanghai line was lowered to 300 kph from its designed maximum of 350 kph.

Zhao Guotang, chief engineer of the Beijing-Shanghai High Speed Railway Corp, said that will save hundreds of millions of yuan spent on power supplies every year and make the trains more affordable to ordinary passengers. Other experts said the lowered speeds may also be the result of safety concerns.

Savings announced to date are far from enough to offset the deficit, especially for the Beijing-Shanghai line, the most costly rail project China has ever undertaken.

China invested 220.9 billion yuan on the line. Half the money came from bank loans.

That means interest payments of 6.05 billion yuan and principle payments of 5.5 billion yuan each year for the next 20 years.

Other costs add up

Allowance for depreciation on railway facilities is around 3 to 4 percent every year, according to Li Changhong, also a professor at Beijing Jiaotong University. That adds up to about 6.6 billion yuan to 8.8 billion yuan for equipment and line maintenance and repair.

Salary for railway staff amounts to more than 3 billion yuan a year, and then there is the rising cost of electricity.

According to the current schedule, the Beijing-Shanghai line will run 90 pairs of trains between the capital and the financial hub every day. The starting fare for a one-way economy seat for the nearly five-hour journey is 555 yuan. That's almost the same as a discounted airline ticket between both cities.

If 80 percent of the 1,100 seats are sold on each run, the line will generate ticket revenue of 37.6 billion yuan a year, compared with combined operational costs, excluding energy, of more than 24 billion yuan.

But whether railway operators can sell 80 percent of seats on the line is unknown.

Supporters say the line is likely to supplant Japan's Tokaido Shinkansen in the future as the world's most profitable high-speed railway.

They point out that the line connects China's two most developed cities, serving 26.7 percent of the population.

But catching up with Japan's achievement or even surpassing it is a "very difficult" proposition, Sun Zhang, a railway professor at Tongji University, told China Business News.

"The Japanese have done an excellent job in cost control," Sun said. "They tried to save every penny in every step as much as possible during the construction."

A seven-day Japan Rail Pass allows unlimited travel on the national railways network, including the Shinkansen. The pass costs 28,300 yen (US$350) for an adult in ordinary class.

But China is not Japan, as critics note.

Zhou Yimin, former chief engineer with the railway ministry, told China Times only 5 percent of passengers on the Beijing-Shanghai line will buy tickets to travel from one end of the line to the other. The rest will get on and off at stops in between.

Dong Yan, a researcher with the National Development Reform Commission, said China is almost certain to lose money on high-speed railway projects, at least in the initial stages.

Cheap seats popular

Zhao Jian, the Beijing Jiaotong University professor, described the Beijing-Shanghai line as a 120-story hotel, with only 25 percent occupancy.

According to him, more than 94 percent of Chinese passengers traditionally choose the cheap hard-seat or semi-cushioned berths when they travel on trains.

Under existing rail service between Shanghai and Beijing, the cheapest fast trip takes 13 hours and costs 179 yuan for a hard seat.

Zhao said he doubts whether Chinese, whose per capita income is less than one-tenth that of the Japanese, would be willing to pay the extra cost to shave the trip time by about half.

But the building of a high-speed railway network appears to be good news for freight operators.

The railways ministry said this month that rail freight in the first five months of this year jumped 7.8 percent from a year earlier. In 2010, it rose 9.3 percent.

The ministry credited the gains to the opening of several high-speed rail routes.

Shuai Bin, a professor with Southwest Jiaotong University, said China's current railway network can meet only up to 70 percent of the country's freight demand.

Longer lines on routes of between 300 kilometers to 800 kilometers have an advantage over other forms of haulage, he said.

Karen Li, a rail sector analyst with JP Morgan, told Reuters that she thinks much of China's railway investment in the past three to five years has been spent in the freight side to help lower logistics costs, which are much higher in China than in developed countries.

The Hong Kong-based analyst said she doesn't think China's high-speed rail network will turn profitable for five to 10 years after the trains start running.

Railway ministry chief economist Yu put the estimate at between four and seven years.

"But building the network is an essential step we need to take if we want to drive the economy in the western area and balance development in different regions," he said, trying to strike a note of confidence.