Xi’s $420 Billion China Rail Push Lures First Private Investment

(Bloomberg) -- China’s Fosun Group will be the first private company to operate an inter-city rail service on the mainland as President Xi Jinping’s $420 billion spending drive to modernize the nation’s transportation network lures investors to a sector that’s been controlled by the state until now.

Shanghai Fosun High Technology Co. signed an agreement with the provincial government of Zhejiang in eastern China to buy a controlling stake in a 46.2 billion yuan ($6.9 billion) high-speed project linking the cities of Hangzhou and Taizhou, the company said in a statement Thursday. The public-private venture will also count Zhejiang Geely Holding Group and Wanfeng Auto Holding Group as partners.

The rare foray by the conglomerate into infrastructure marks a shift in China’s strategy to finance growth as Xi seeks to revive an economy that’s expanding at its slowest pace in 25 years. China’s top planning body kicked off a three-year action plan earlier this year to develop major transportation infrastructure across the country to help bring development to rural areas. The government’s willingness to allow private capital in railways could pave the way for similar investment in the nation’s airports and ports, according to Chen Suming, an analyst at Shanghai Chongyang Investment Management Co.

“Introducing these players could ease investment burdens shouldered by local governments,” Chen said. “There’s been a strong interest.”

China’s investment in railways in the five years through 2020 will be no less than 2.8 trillion yuan, according to the National Railway Administration.

The central government will give “top priority to development,” with infrastructure and fixed-asset investment central to that strategy, Premier Li Keqiang told lawmakers earlier this year, while the National Reform and Development Commission said more than 300 projects will be launched between 2016 and 2018, focusing on building higher-quality rapid-transport networks and network upgrades.

China spent more than $10.8 trillion in infrastructure in the last decade alone, according to Bloomberg calculations based on official data of investment in categories such as transport, storage, power supply and water conservation. Total fixed asset investment is projected to increase by 10.5 percent this year, with infrastructure investment a familiar way for Chinese authorities to shore up the slowing economy.

Urban Networks

China has so far allowed non-state investors in only urban transit networks such as those in Shanghai and Beijing.

The Fosun-backed railway investment is one of eight pilot railway public-private partnership investments NDRC announced earlier this year. They are three high-speed rail, four intercity rail and one subway.

Fosun will be responsible for raising at least 51 percent of the equity for the project, or 7.1 billion yuan, through its private equity vehicle Sunvision Capital, Fosun said.

Sunvision manages over 30 billion yuan in funds and has a project pipeline worth almost 500 billion yuan across China, according to Fosun. The Zhejiang project will be completed in four years and operating for 26 years, according to the company.

Investments by private companies are more likely to happen in regional lines, such as those connecting cities within a single province and subways, Chongyang’s Chen said.

“At the heart of the negotiation in these PPPs is how much discretion the private player can have in terms of train service deployment and how much of the gains they can retain and how much is ceded to the state operator,” Chen said. “All these will directly impact the level of enthusiasm.”

--With assistance from Saleha Mohsin Catarina Saraiva and Enda Curran To contact the reporter on this story: Jeanne Yang in Shanghai at jyang543@bloomberg.net. To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net, Sam Nagarajan

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