After more than 10 years of careful examination and research, construction of the Beijing-Shanghai high-speed railway will start soon. The line, which is expected to begin operation in 2010, will be built with the most advanced technology and the highest single investment in China's railway building history.
The budget for the 1,318-km track is about 220 billion yuan ($30 billion). On December 27, 2007, the Beijing-Shanghai High-Speed Railway Co. Ltd. was officially set up to raise funds for the project, with a registered capital of 110 billion yuan ($15 billion).
China Railway Investment Corp. (CRIC), representing the Ministry of Railways, holds 52 percent of shares of the high-speed railway company and is the biggest shareholder. The National Council for Social Security Fund is also one of the major shareholders.
Chinese banks, including China Development Bank, China Construction Bank, Bank of China, and the Industrial and Commercial Bank of China, had all shown interest in the project, but none of them was invited to become its shareholder.
Ping An Asset Management Co., an investment fund made up of assets from a variety of insurance companies, will invest 16 billion yuan ($2.2 billion), or 13.93 percent of the project's cost. It is the second biggest shareholder in the project and is also considered the biggest beneficiary of the project. Participating insurers in the fund include China Pacific Insurance (Group) Co. Ltd., Taikang Life, Taiping Life, the People's Insurance Co. of China (PICC) Property and Casualty Co. Ltd., China Reinsurance (Group) Co., and General China Life Insurance Co. Ltd.
This is the first time that Chinese insurance companies have cooperated to invest in a large-scale infrastructure project
Among the shareholders in the project, the insurance consortium is the only investor without a government background. Sun Jianyi, Vice General Manager of Ping An of China, stated the insurance fund's participation in the Beijing-Shanghai high-speed railway is a new experiment and will bring insurance companies long-term and stable profits. Sun added that the China Insurance Regulatory Commission (CIRC) had contributed a lot to forming the insurance partnership.
As early as in 2006, CIRC lobbied hard for insurers' participation in the Beijing-Shanghai high-speed railway. In July that year, CIRC Chairman Wu Dingfu said, "The Ministry of Commerce has agreed to raise 80 billion yuan ($11 billion) from the insurance fund, which will be invested in reconstructing the Beijing-Shanghai Railway."
The ministry's decision was in line with the State Council's direction to raise the proportion of insurance funds in the capital market. In March 2006 CIRC officially launched a trial regulation guiding insurance funds to indirectly invest in infrastructure.
In 2006, Ping An became the leading company in the first batch of 12 billion yuan ($1.65 billion) of infrastructure projects that included funding the building of expressways and public utilities like water and power grids. Ping An invested 10 billion yuan and the other 2 billion yuan ($0.28 billion) worth of projects were shared by China Life, PICC and Taikang Life. The projects included 2010 Shanghai Expo, expressways, Shanghai subway and airport.
In July 2006, the first indirect insurance fund invested infrastructure project was the Shanxi expressway. It was funded by China Ping An Trust & Investment Co. Ltd. (Ping An Trust) under Ping An. Ping An Trust also invested in many other infrastructure projects including the Jingdong Expressway in Hubei Province, and a tap water project in Liuzhou in the Guangxi Zhuang Autonomous Region.
At the 2007 national railway work conference, Liu Zhijun, Minister of Railways, stated that railway construction in 2007 would use new financing channels, including insurance funds. The State Council agreed that insurance companies could invest 40 billion yuan ($5.5 billion) in railway construction. Those agreements laid a solid foundation for insurers to invest in infrastructure projects.
Following its initial 16 billion yuan ($2.2 billion) investment, the insurance consortium has no intention to stop. Sun stated that the Beijing-Shanghai high-speed railway will introduce strategic investors through equity financing and debt financing. In terms of debt financing, Taikang Asset Management Co. was entrusted to sell three-year bonds of the high-speed railway in 2007. The other 12 insurance companies bought 10 billion yuan ($1.37 billion) in railway bonds. CIRC officials said the 16 billion yuan ($2.2 billion) was just starting capital. As the railway construction continues, it will be possible to readjust the amount of investment.
The high and stable return of investment of the railway project is the biggest attraction for investors. Liu believes the average annual yield could reach 8-12 percent.
Liu explained that after the high-speed railway is completed, it will serve to transport passengers only, while the current Beijing-Shanghai Railway will be mainly used for cargo transportation. At that time, the annual passenger transportation capability of the high-speed railway is expected to reach 80 million, twice the current 35 million.
Xinhua News Agency reported the planned speed of trains on the line is 350 km per hour. The railway will connect the three municipalities of Beijing, Tianjin and Shanghai, as well as Hebei, Shandong, Anhui and Jiangsu provinces. It will also connect the Bohai Sea economic circle and the Yangtze River delta, which are two most vibrant economic regions and the busiest cargo and passenger transportation hubs in China.
Despite the apparent gains, China Life did not think it was a good idea to invest in the project. In early November last year, CIRC held a conference to discuss the possibility of investment, and China Life was one of the participants.
However, China Life did not show up to the signing ceremony of the agreement.
The absence of China Life showed its concern over the uncertainties of the high-speed railway. Xinhua quoted a China Life insider as saying, "There are many uncertainties and the risk is high. We are commercial insurance companies and investment return is our biggest concern." He said, as the company could not handle the risk, it chose to quit.
Wang Xiaogang, an insurance analyst from Orient Securities, contended after careful examination that some commercial insurance companies are worried about whether the yields could reach the expected 8-12 percent. They would rather invest in mixed ways like issuing convertible bonds.
Li Kemu, Vice Chairman of CIRC, also reminded insurers that they should be very cautious in investing in infrastructure. Li said, "It is a good thing, but not easy. Underestimation of investment risks could cause insurers huge losses."
Currently, investment in commercial real estate is relatively favorable for insurers. For instance, some insurance companies have cooperated with well-known shopping centers and bought designated commercial properties. They can sign a 15-20 year long-rent contract, thus gaining long-term investment revenue. Annual yields can reach as much as 30 percent.