Foreign Investment in China's Freight 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: