UPDATE: China Wants to Conduct the World’s High-Speed Rail Market

December 12, 2014

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

The construction of the American transcontinental railroad in the 1860s, which cost upwards of $136 million and covered 1,800 miles over arduous terrain, could not have been as easily accomplished without the major influx of Chinese immigrants into California. Tens of thousands of Chinese laborers worked grueling 12-hour days, six days a week, often at paltry wages and with little or no accommodations. They gained a reputation as indefatigable and resilient workers because they hardly ever became ill or died as a result of their boiling all of their drinking water and pasteurizing their food.

In the 1860s Central Pacific Railroad Employed Over 12000 Chinese Laborers

Now, close to a century and a half later, the Chinese want to return to the railroad business. This time, however, they strive to become the world’s leading go-to provider of high-speed rail and exporter of mass transit technology.

They certainly have the credentials and experience to back up their ambitions. By the end of last year alone, more than 6,800 miles of high-speed rail spanned the fourth-largest country, with another 7,500 miles currently under construction. UBS’s research reports that “China has the largest high-speed rail network in the world, with a total of more than 20,000+ kilometers [12,400+ miles] high-speed passenger-dedicated lines scheduled to be operational by end-2015.”

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A lot has changed with Chinese rail since I previously wrote about it back in March 2012. Back then, the country was struggling to get new projects started, one of the catalysts of which was a bullet train crash in 2011. At the time, out of five countries, including Australia, the U.S., Russia and China, the Asian giant came in last place for the total length of railway per capita.

Then, in August 2013, BCA Research highlighted the massive increase in the country’s urban subway systems, as the “length of light rail and metro will be extended by 40 percent in the next two years, and tripled by 2020.”

The Closer: Chinese Premier Li Keqiang

We’re currently seeing the arrival of this Chinese railway Renaissance.

As I told Wall St for Main St a couple of days ago: “The [Chinese] government is promoting light rail train everywhere in the world, and it’s only accelerating.”

China Seeking Consumers
In recent months, Chinese Premier Li Keqiang has emerged as the nation’s top salesman for what he calls the “New Silk Road”—miles upon miles of high-speed transportation connecting all corners of the world. His plan might very well become one of China’s most lucrative exports and culturally significant contributions to the world: fast, efficient and reliable railways.

Which many areas of the world sorely need.

In numerous countries, including here in the U.S., rail systems are outmoded and deteriorating. Five years ago, the U.S. Department of Transportation’s Federal Transit Administration concluded that “more than one-third of [rail] agencies’ assets are either in marginal or poor condition, indicating that these assets are near or have already exceeded their expected useful life.” A whopping 92 percent of railroad ties in the U.S. are still made of wood and, in many cases, fall within a range of 15 to even 100 years old. A few lines, such as the one that connects Los Angeles and Las Vegas, no longer receive regular service.

In India, where thousands of citizens rely on mass transportation, railroads have been combating ayears-long rash of onboard fires relating to aging equipment and poor electrical maintenance. Last month, the state-owned India Railways chalked out plans with China to improve its lines and begin construction on a $33 billion, 1,090-mile high-speed rail connecting Delhi and the southern coastal city of Chennai.

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Also in November, China Railway Construction Corp. (CRCC), which we own in our China Region Fund (USCOX), signed a contract with Nigeria to construct a $12 billion, 870-mile rail system from Lagos, the nation’s second-most populous city, to the seaport town of Calabar. In an effort to shed China’s reputation for using only Chinese workers in foreign projects, CRCC Chairman Meng Fengchao “pledged to hire at least several thousand workers from Nigeria,” according to Bloomberg Businessweek.

China at the starting gates

But China’s most ambitious plan to date comes in the form of a proposed $230 billion high-speed rail system linking Beijing and Moscow—what will be the longest in the world of its kind—which will largely replace the storied 100-year-old Trans-Siberian Railway. Whereas the Trans-Siberian takes about six days one-way, the new high-speed line will cut travel time down to only two days. The estimated distance is 4,350 miles, “more than three times the world’s current longest high-speed line, from the Chinese capital to the southern city of Guangzhou,” according to Business Insider.

Following the announcement, the market handsomely rewarded CRCC. Since the end of October, its stock has surged 16 percent, beating for the first time this year the Hang Seng Composite Index, the benchmark for USCOX.

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Just as significant as the proposed line itself is what it symbolizes: a strengthening relationship between Beijing and Moscow. Already Russia has signed a multibillion-dollar gas and oil export deal with its southern neighbor, a clear snub at the European market.

In any case, China’s goal is to do for other countries what it has done for its own. In only ten years’ time, China has amassed an impressive network of rails that helps citizens from all corners of the nation—from the rural to urban—stay connected.


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Emerging-High-Speed-Rail-Hub-Cities  High-Speed Rail

Unfathomable Amounts of Resources Will Be Needed
As impressive as the Beijing-Moscow project is, it only begins to reveal the large host of jobs China has lined up.

In the map below, each shaded country denotes the location of current or pending Chinese projects, with many more possibly to come. UBS reports that 64 new projects have been signed in 2014 alone, with the months of October and November seeing a huge spike in approvals.

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A few highlights are worth mentioning. Last March, CNR Dalian Locomotive and Rolling Stock Company signed a $17.6 million contract with Ethiopia to provide 41 modern tramcars. Around the same time, South Africa ordered 232 diesel locomotives from CNR, a job worth $930 million. In July, China, Peru and Brazil agreed to cooperate on the construction of a railway that would connect the Peruvian Pacific coast to the Brazilian Atlantic coast. And in October, the Massachusetts Department of Transportation awarded a $567 million contract to CNR to build 284 train cars for Boston’s subway system.

Frank Holmes - High-Speed Train, China

These projects will require astronomical amounts of resources and raw materials, including heavy-duty steel, carbon fiber, aircraft-grade aluminum, copper and concrete—all of which should bode well for our Global Resources Fund (PSPFX).

Missing in action here is California, but perhaps not for

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