This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Is China's Rail Freight Reform Heading for a Train Wreck?

BEIJING (TheStreet) -- It's not every day that a state-run newspaper in China lays bare ugly details of a dispute between an angry businessman and the government's railroad. But these are stressful times for the rail freight business and its customers in China -- so stressful that the newspaper in the city of Zhengzhou and government media censors, in an unusual move, last week let the businessman publicly vent grievances over rising freight charges.

Pressure in the rail freight sector has been building since China launched far-reaching market reforms for the national railroad system one year ago, just as the nation's economy was starting to lose steam.

Beijing eventually hopes to wean the government's China Railway (CRWOF) from public support by letting the market determine freight rates, passenger ticket prices, train schedules and employment levels. A new system for "fully reforming" the freight system is scheduled for roll-out June 15, China Rail announced last week.

What does this mean for investors?

It won't be easy. China Rail, which is listed on the Hong Kong and Shanghai stock exchanges, is a mammoth monopoly with deep government roots. It employs more than 2 million people, operates more than 60,000 miles of track and hauls most of the coal, iron ore and other bulk commodities vital to China's manufacturers. Its price controls have for years held down costs for freight customers.

Since the reforms were launched in May 2013, China Rail has been spun off from the government's Ministry of Railways and told to move toward marketization. Meanwhile, though, the railroad's central bureaucracy continues to oversee more than a dozen regional divisions, including Zhengzhou Railway and New York-listed Guangzhou Shenzhen Railway (GSH), each of which carries passengers and freight.

The reform's changes have strained relations with freight customers. The Henan Business Daily said the angry businessman, surnamed Qian, claimed that China Rail's Zhengzhou division had raised prices unfairly and dramatically by billing his company's flour shipments according to the weight of filled railcars. Before the change, shipping charges were based on cargo weight alone. Qian called the railway's bosses "unreasonable."

In fact, though, Zhengzhou's rate adjustment was in line with a central government decision in February aimed at lifting official controls on freight rates. China Rail gave each division the power to set new rates based on supply and demand.

The move effectively raised freight charges for all rail shipping nationwide, according to a recent report by Guotai Junan Securities. These hikes, coupled with the ongoing economic slowdown in China, are likely to reduce rail freight volumes and revenues, at least in the short-term, the report said.

Guotai Junan also cited overall risks for investors in the China rail sector, echoing a Morgan Stanley analysis of Guangzhou Shenzhen Railway in April.

Morgan Stanley's report cited a disappointing first quarter and a 64% year-on-year decline in 2013 earnings for the railway, which operates in the busy manufacturing zone near Hong Kong that includes the cities of Shenzhen and Guangzhou. The bank reacted by cutting its target price for Hong Kong-listed shares by 15%, and warned investors of "negative growth prospects" for the railway through 2016.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
SYM TRADE IT LAST %CHG
CRWOF $1.03 22.62%
GSH $23.19 -2.60%
TSLA $191.42 0.45%
YHOO $44.94 -0.02%
AAPL $125.24 -0.89%

Markets

DOW 17,863.70 -112.61 -0.63%
S&P 500 2,075.53 -10.71 -0.51%
NASDAQ 4,920.1210 -27.32 -0.55%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs