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China no longer has the world's fast trains. It was forced to slow its lines amid revelations of corruption and corner cutting by contractors.  (Source: Reuters)

China's rail project faces soaring costs. At the same time the trains themselves have few riders due to the high ticket prices.  (Source: China Daily Photo)
Will corruption derail China's $1T USD train gambit?

It sounded like a perfect plan -- high-speed trains that would carry passengers at speeds almost equivalent of commercial airplanes.  But now, thanks to government corruption and quality issues, the project may never arrive at the station.

In February Liu Zhijun, the man in charge of China's $1T USD high-speed rail bid, was fired.  Under investigation on corruption charges, the 58-year-old's departure signaled the start of some major questions about the future of the project, which seeks to lay down as much track, in length, as a third of America's interstate highway system.

This month, amid rumors of trains almost literally derailing, China's Railways Ministry announced that it would be dropping the top speed of trains from 218 mph to 186 mph.  It would not comment on safety concerns other than to say the issues were "severe".  The slowdown drops China from having the world's fastest trains to being in a virtual tie with Europe and Japan.

It also announced plans to slow construction and drop ticket prices in order to try to close a budget deficit.  The Railways Ministry owes $276B USD to Chinese banks and failed to turn a profit in the first three months of the year -- at a time when it was expected to be turning the corner.

Patrick Chovanec, a professor at Tsinghua University in China states in an interview with The Washington Post, "They’ve taken on a massive amount of debt to build it."

Zhao Jian, a professor at Beijing Jiaotong University, says the project could lead to bank failures.  He states, "In China, we will have a debt crisis — a high-speed rail debt crisis. I think it is more serious than your subprime mortgage crisis. You can always leave a house or use it. The rail system is there. It’s a burden. You must operate the rail system, and when you operate it, the cost is very high."

Some of the funds for the project have been going towards their intended purchase -- laying rail.  Others have been going towards questionable expenditures like elegant glass and marble for the country's 295 train stations.  And there are rumors of local officials, including a woman in Shanxi province, setting up companies to take kickbacks from contractors.

Officials on the Beijing-Shanghai line project are accused of accepting $28.5M USD in bribes.  On top of that, the former Railways Ministry chief, Mr. Zhijun, stands accused of pocketing $122M USD.

"Engineers" working on the vital Beijing-to-Shanghai line actually had no credentials or formal education.  And in March government officials also found scores of fake invoices, which resulted in the government paying for phantom work.

Much like the Chinese manufacturing industry's struggles, there are fears that contractors are also cutting corners with substandard materials. 

In order to ensure safety, train tracks must be built with high quality fly ash, mixed with concrete.  But contractors are suspected of using lower quality ash mixed with other substances, potentially compromising miles of track.

Despite having the world's second largest economy, China's average yearly per capita income of $4,300 USD is well below the world average, according to the International Monetary Fund.  One of the biggest problems facing the train system is that the people of China are simply unable to pay the prices of tickets, which remain exorbitant by the nation's standards.

The government shut down older, cheaper slow train lines in a bid to get migrant workers to use the new lines.  But the tickets were too expensive and the bid failed -- the workers turned to the bus system, clogging highways.

China will have another crack at it, next February when the migrant workers once again return home in a brief exodus.  But it remains to be seen if the government has dropped prices enough to sell tickets -- and if it will be able to ensure the passengers safely reach their destination. 

The Asian giant's struggles are of great interest to the U.S., which is contemplating a much smaller government-backed high-speed rail effort.

 



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RE: The real question remains....
By toyotabedzrock on 4/29/2011 12:13:19 AM , Rating: 2
I have to wonder why our corporations think they will make a profit by moving there.

Unless they have a corrupt deal with the Government there already.


RE: The real question remains....
By Strunf on 4/29/2011 8:01:53 AM , Rating: 4
Multinationals love corrupt governments, it makes everything much easier and in the end cheaper for them.


RE: The real question remains....
By Reclaimer77 on 4/29/11, Rating: -1
RE: The real question remains....
By bah12 on 4/29/11, Rating: 0
RE: The real question remains....
By Reclaimer77 on 4/29/11, Rating: -1
RE: The real question remains....
By bah12 on 4/29/2011 4:20:17 PM , Rating: 1
Oh I agree 100% there are a plethora of reasons to move, my point was that wages alone are more than enough to convince most businesses. In all honesty given the issues you and I both have raised it makes very little sense to make something here if geography is not at play.

The sad thing is I'm actually surprised we have any manufacturing at all still on our soil. It is a very slippery slope, and I hope and pray we are not too far over the edge to keep from recovering.


RE: The real question remains....
By yomamafor1 on 4/29/2011 5:03:38 PM , Rating: 6
Ahh, blame everything on the tax, eh? Perhaps you should recheck your figures before spewing out FUDs about these "insane taxes".

Capital gain tax in US: 15% for short term, 0% for long term
Capital gain tax in China: 10% for foreign company, 25% for domestic company.

Payroll tax in US: 5~35%
Payroll tax in China: 5~45%.

Corporate tax in US: 15~35%
Corporate tax in China: 10~20% for foreign company, 25% for domestic company.

http://www.pwccn.com/webmedia/doc/6339888577346518...

Insane indeed =).

No, the only reason why businesses move to China is to take advantage of Chinese' willingness to accept ultra-low wages. In Shanghai, the minimum wage in 200 USD per month, and in some part of China, 100 USD per month. Not to mention the fact that Chinese are willing to accept poor working condition and longer working hours than their American counterparts.

So the question becomes this: why would you hire somebody to do a job for $45k a year, when you can hire equivalent skill in China for less than $3600?


RE: The real question remains....
By Reclaimer77 on 4/29/11, Rating: -1
RE: The real question remains....
By yomamafor1 on 4/29/2011 6:28:36 PM , Rating: 4
LOL, what can the Obama Administration do anything about the fact that Chinese people are willing to accept $3600 a year for a job? There is no way United States will become a manufacturing industry, period. The standard of living is simply too high here. By the way, Chinese government does not impose health insurance on the companies. They impose that on the citizen, so of course the companies are not going to have a problem with it. Personally I prefer the single payer solution, but again, apparently it is considered "socialism" to have state sponsored medical insurance.

What we should do is invest in the future, in the technology, not trying to lower the taxes to attract those companies to return. They are not going to return, not until the Chinese government begins to give a damn about their workers' rights (ironic given it is a communistic regime), and their environment. On that front, the Obama Administration did increase funding for education, provide subsidy to alternative energy source, and biotechnology; two of them are considered world wide to be the up and coming industries in the next few decades.

Oh, and those "heavy regulations" are there to protect us, and our environment. Have you been to Beijing? Of course you haven't, because if you have, you wouldn't have that much of a problem with the regulations. Have you been to Yellow River? Again, of course you haven't as well. The facts of why we can still fish on the river, go to the beach, and drink the water from the tap are the direct results of those "heavy regulations".


RE: The real question remains....
By Alexvrb on 4/30/2011 9:56:56 PM , Rating: 2
The issue with state sponsored medical insurance is that it becomes yet another entitlement, another form of government aid, another welfare. We already have a large chunk of the population relying on government aid. I personally see it abused to hell and back, and it's a shame, because there are some who truly need it. Regardless, the burden on those paying only increases further. If you want to cut out some other social programs to cover this, I'd go for it.

Also, investing in the future is just code for more stimulus spending. You could increase education spending tenfold, and without actual reform (in the education system and in goverment spending), you won't accomplish anything.

We is needza edumacate our chillins! Den, dey is be pay off debt for us!


By YashBudini on 4/30/2011 11:08:51 PM , Rating: 3
quote:
LOL, what can the Obama Administration do anything about the fact that Chinese people are willing to accept $3600 a year for a job?

You don't understand Reclaimer77's position. He's been programmed by the RNC and Faux News, no amount of honesty outside of that world can be comprehended. You can get +5s and even +6s from now until doomsday and it won't make any difference. He's programmed beyond on the rational, he and his kind know no other way, no options of rational recourse exist. That's why all those that oppose his kind have only hollow victories in their eyes, no matter how concrete reality actually is.

All you can with stagnant people is to pity them. He'll be screaming at someone else of his flawless and absolute logic in the morning, it is inevitable.

Go ahead Spuke ask me for a reference. I dare you.


RE: The real question remains....
By ElFenix on 5/3/2011 1:32:34 PM , Rating: 2
short term capital gains rates are ordinary income rates, long term capital gains rates can be 0% if your ordinary income rates are 15% or lower, or 15% if ordinary rates are higher than 15%. i suppose that means that if your only income is capital gains then your long term rate is 0%.


RE: The real question remains....
By TheTruth on 4/29/2011 3:47:04 PM , Rating: 3
The thing you're not taking into account is the type of job union joe is doing.

If you could make the same amount of money in an air conditioned mcdonalds as standing all in day in a hot, dirty, and potentially dangerous environment which would you choose?

In either case closing that gap will only result in a higher number of people on government aid and fewer people providing the money to pay it.


RE: The real question remains....
By Lerianis on 4/29/2011 4:22:02 PM , Rating: 2
So, basically you feel that a person doing a... janitor job is less worthy of good pay than someone doing another 'highly technical' job and should have to live a life in poverty? NOT AGREED!

The fact is that we have NOT driven up the cost of manufacturing things in America. In fact, adjusted for inflation, most people are getting paid LESS than they did in the 1970's.... 1/2 to 2/3rd's less!

So, let's stop with the bullplop that we have made it 'so expensive to do business in America'. The real problem is that we are not using our TRADE TARIFFS to take into account that China is undervaluing their labor AND their currency.


RE: The real question remains....
By Reclaimer77 on 4/29/2011 6:11:50 PM , Rating: 2
quote:
So, let's stop with the bullplop that we have made it 'so expensive to do business in America'. The real problem is that we are not using our TRADE TARIFFS to take into account that China is undervaluing their labor AND their currency.


If only it were that simple.

Did you know it costs a billion more for Intel to build, equip, and operate a semiconductor manufacturing facility in the United States? One BILLION dollars! And we wonder why our tech jobs are going oversees?


RE: The real question remains....
By yomamafor1 on 4/29/2011 7:08:16 PM , Rating: 2
...and the Intel fab in Dalian, China costs $2.5B. Would you say it is more costly for Intel to build and operate a fab in China than in the States?

http://techgage.com/pr/intel_begins_construction_o...


RE: The real question remains....
By Reclaimer77 on 4/29/2011 7:24:03 PM , Rating: 2
Can you read? The CEO of Intel said that. So if that Dalian plant was built here, it would have cost $3.5B. I said a billion MORE, key word MORE.


RE: The real question remains....
By yomamafor1 on 4/29/2011 7:48:29 PM , Rating: 2
Perhaps you should include a link to your source next time.

But fair enough.


By YashBudini on 4/30/2011 11:24:23 PM , Rating: 2
Hey Spuke why didn't you ask for a reference?
(Like that question needs to be asked [rolling eyes])

Notice though none of these pro-corporate types ever go to these foreign countries to work and be exposed to their pollution. Is that because their health is priceless? I doubt they will answer.


RE: The real question remains....
By YashBudini on 4/29/2011 5:26:53 PM , Rating: 2
quote:
Because we've driven the cost of doing business here up so high it actually makes SENSE to move to China?

Says who? The lobbyists? We can't compete with any group earning a couple of bucks per day even if all regulations were to end immediately.

The day we as a society become that globally competitive is the day, like them, you will consider the cars you take for granted now as nothing but a pipe dream.

Please continue to blame everything only on the issues you've been instructed to address.


RE: The real question remains....
By ClownPuncher on 4/29/2011 7:54:44 PM , Rating: 2
Germany does quite well in global trade, export and manufacture.


By YashBudini on 4/29/2011 8:12:51 PM , Rating: 2
I can't tell if you don't get it or refused to. Global means third world across the globe. They are in the same predicament we are, along with all developed countries.


RE: The real question remains....
By Kiffberet on 5/3/2011 8:25:31 AM , Rating: 2
Excellent point!

The unions are very strong in Germany and they can still compete with China in manufacturing.

And they tax the be-jesus out of every company and person in the country. The difference is, the taxes go towards educating the population, infrastructure and welfare, instead of bombing Iraq and Afghanistan, tax breaks for the rich and paying billions a year in interest on sovereign debt.


By YashBudini on 5/3/2011 5:11:00 PM , Rating: 2
To a lot of readers here you essentially stated Germany is 100% socialist. That would be the same group that believes bombing is a better way to go.

For some reason never explained the US government is 100% incompetent at everything but the military, where all of a sudden they are perfect and beyond question.


"So if you want to save the planet, feel free to drive your Hummer. Just avoid the drive thru line at McDonalds." -- Michael Asher














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