Foreign Investment in China's Freight Railways

January 31, 2002 | BY

clpstaff &clp articles

The PRC's railway system is at a critical point in its development.  After decades of inefficiency and financial losses, the Ministry of Railways…

The PRC's railway system is at a critical point in its development. After decades of inefficiency and financial losses, the Ministry of Railways (MOR) has taken key steps to modernize the railway industry in the last two years. For example, after laying off about 100,000 workers in 2001, last month a further 20,000 rail workers were made redundant in an attempt to improve efficiency in this sector.1

The catalysts for modernization are twofold. First, the commitments made by China prior to its entry into the WTO on December 11 2001 required the PRC to loosen its grip on the control of the railways. Second, MOR has recognized that foreign investment is urgently required to improve rail infrastructure and the development of technology in the railway industry.

As part of these reforms, MOR and the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) jointly promulgated on August 29 2000 procedures stating that foreign investors would be allowed to invest in China's freight railways for the first time.2 Subsequently, the PRC's WTO commitments in this sector have resulted in the following blueprint for introducing foreign investment and competition into China's freight railways:

1) currently, foreign and Chinese investors can establish a Sino-foreign railway freight transport joint venture (Rail Freight JV) provided that foreign investment in the Rail Freight JV does not exceed 49%;

2) within three years of WTO entry, foreign investment in a Rail Freight JV may exceed 50%; and

3) within six years of WTO entry, rail freight companies operating in the PRC can be wholly foreign-owned.

Regulatory Framework

The current regulatory framework in this area is based on the Examination, Approval and Administration of Foreign Investment in the Railway Freight Transport Industry Tentative Procedures (the Procedures), effective from August 29 2000.3

The Procedures set out the following conditions for establishing a Rail Freight JV:

1) the Chinese party must hold at least 51% of the shares in the Rail Freight JV for a term specified by the government;4

2) the principal foreign investor must be a company both with strong capital funding and which has been successfully engaging in the railway freight business for more than 10 years. Similarly, the principal Chinese investor in the Rail Freight JV must also have more than 10 years of railway freight business experience;

3) the Rail Freight JV must have a minimum registered capital amount of US$25 million;

4) the Rail Freight JV must have the necessary freight transportation vehicles and rolling stock (which may be owned or leased by the Rail Freight JV), use of suitable station facilities, a stable freight supply and the personnel required to operate a Rail Freight JV; and

5) in general, the term of the Rail Freight JV shall not exceed 20 years.

The application process for establishing a Rail Freight JV can be summarized as follows:

1) if the joint venture has a total investment amount of US$30 million or more, the State Development Planning Commission must approve the application;

2) a Railway Freight Transportation Operation Permit (RFTOP) must be obtained from MOR;

3) a Certificate of Approval for Foreign Investment Enterprises must be obtained from MOFTEC;

4) a business licence must be obtained from the State Administration of Industry and Commerce; and

5) the Rail Freight JV must also apply to MOR and MOFTEC for approval to establish a branch office inside or out of the PRC.

MOR has reserved the right to suspend the business activities of a Rail Freight JV or to revoke a RFTOP if a Rail Freight JV is in violation of any of the laws and regulations of the PRC. To assist MOR in this supervisory role, the Rail Freight JV must continue to submit key documents at regular intervals. For example, it must file a report outlining the Rail Freight JV's operational status annually.

Finally, the Procedures provide that a Rail Freight JV must conduct and develop its business in accordance with the overall structure of the "unified arrangement" presently in place for China's railway system. Such language emphasizes the political importance of the PRC maintaining the overall control of the national railway network.

Full Steam Ahead?

After the Procedures were announced, it was widely believed that allowing foreign companies to set up a Rail Freight JV was an exciting development that could lead to the complete liberalization of China's rail industry, including passenger rail services.5 However, to realize the potential of such developments, the PRC has to ensure that suitable foreign capital investment is forthcoming. While MOR has apparently entered into negotiations with a number of companies from the United States and Canada,6 the PRC's first Rail Freight JV has yet to be established.7 Until this takes place, China's long-term plans for rail modernization are at a serious risk of being derailed.

Endnotes

  1. "Railways to axe 20,000 workers," China Daily, January 2 2002.
  2. Investors from Hong Kong, Macao and Taiwan are treated as "foreign investors" in this context.
  3. China Law Reference Service 3-2001(4).
  4. The term is not specified in the Procedures. However, it is assumed that the term would reflect the PRC's WTO commitments as set out above.
  5. "The Ministry of Railways: Foreign Investors Can Participate in the Operation of the PRC Railway Freight Transportation upon PRC's Entry into WTO," High Speed Rail Horizon, http://cmz.533.net/20011118.htm, November 9 2001.
  6. "China Encourages Foreign Investment in Railway Business," Asia Pulse, November 21 2001.
  7. According to an unofficial interview with MOR, January 16 2002.

By Tom Snelling, Jingjie Lu
and Jonathan Cobb Mixter,
Freshfields Bruckhaus Deringer,
Hong Kong

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