Last month, President Obama spoke in his State of the Union address about the need for a better national infrastructure. In almost the same breath, he mentioned China's high-speed railway system as a goal, or at the very least a model to guide the nation's development path. The track the Chinese have laid is a grand one: almost 8,100 miles of high-speed rail lines and more than 11,000 miles of traditional railroad lines. The price tag on the project is equally gargantuan, with $750 billion allocated total, of which more than half - $395 billion - is dedicated to the high-speed rails. The total price tag of the project exceeds the $700 billion allocated to the Troubled Asset Relief Program that the United States government passed in 2008 to rescue the entire financial sector and indirectly the U.S. economy.
It is hard not to be in awe when presented with those kinds of numbers, and in practice, the results are still more amazing. The Wuhan-Guangzhou High-Speed Railway, a line that connects the two largest cities in central and southern China, completes the 600-mile journey in three hours. The distance between New York City and Charlottesville, by comparison, is only slightly more than 400 miles and takes about seven hours to travel by train.
The benefits of high-speed rail are obvious, and it seems that China was one step ahead of the U.S. again.
Except everything hit a speed bump Feb. 12, when Liu Zhijun, chief of the Chinese Ministry of Railways, was fired. The dismissal was all the more surprising because bureaucrats of Liu's rank rarely ever are removed. The Communist Party's disciplinary committee is investigating Liu for severe violations of discipline.
Some of the concerns that were raised against Liu were the fact that he may have cut corners to keep the nationwide railway project on schedule and within budget at the expense of safety. A individual with ties to the ministry stated the system's tracks were lacking in the application of chemical hardening agents and conditions were such that the trains would be unable to maintain current speeds of more than 200 miles per hour for any more than a couple of years. Because of their poor condition, there is a possibility that the trains will have to run at speeds nearly 15 percent slower within a few years as the rails become less and less straight. Furthermore, although China's railway system is based on the designs of Japanese bullet trains, the Chinese version runs at a speed that is 25 percent faster. Pushing the speed limit of this model may be dangerous.
In addition to concerns about its national railway system, China's infrastructure also has been threatened by doubts about one of its major corporations. Lucas McGee Research, an otherwise unknown research company, recently released a report on China Agritech (NASDAQ:CAGC), accusing the company of being a fraud. China Agritech owns factories in China capable of producing 50,000 tons of dry fertilizer annually, according to company reports. Lucas McGee Research claimed, however, that when they visited the factories described in the annual reports, they did not see the activity that one would expect in a behemoth production facility.
There are of course questions as to the legitimacy of the report. One large defense of China Agritech is the fact that the Carlyle Group, one of the most respected private equity firms in the world, has both an equity stake and a nominee on the company's board.
Yet Carlyle has filed a prospectus to register and sell its stock, and Lucas McGee claimed that China Agritech's supposed large customer, Sinochem, informed them that they do not sell Agritech products, though the claim was later rebutted. The research body further claims that Chinese government officials have not given Agritech a license to manufacture granular fertilizers - the company's largest product line. The free market has responded to all this with a glowing win for Lucas McGee, as Agritech's stock price plummeted from $30 to $8 per share.
Without a doubt, China is the greatest growth story of the beginning decade of the 21st century. Under a careful administration, the country has managed double-digit growth rates and positioned itself for even greater future growth through an emphasis on building infrastructure. But, all that glitters is not gold. There are many promising developments in China, yet there are also pitfalls. As the country comes to center stage in the global power struggle, it needs to remain watchful that it does not overlook its mounting problems.
Hideyuki's column runs biweekly Wednesdays. He can be reached at h.liu@cavalierdaily.com.
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