Master programme in Economic Growth,

Innovation and Spatial Dynamics

On the Railways of Growth:

China’s Railway, Technology and Economic Growth

Tatiana Pyshkina

Abstract: Railway expansion is usually associated with containing and supporting economic growth. This particular research approaches railways from the angle of technological potential. It explores whether railways can drive China towards technology-led growth, and if so, the way in which this process occurs. The study uses a theoretical framework of complementarities adjusting it to the qualitative analysis of railway expansion. It helps to uncover major technology-led areas of growth in China’s railway industry and their broader potential impact on economic development. Significant conclusion of the research is that railway expansion induced the development of a new major technology-led growth area in China – High Speed Railway. HSR results into the increased demand for technology commercializing the railway industry, and attracts new partnerships, through which massive amount of technology transfer with the biggest local railway equipment supplier occurs. As an outcome, China’s domestic suppliers become more independent and competitive. The research makes a contribution to technology-led, efficiency-oriented view on China’s economy.

Key words: China Railways expansion, High Speed Railways, technology, economic growth.

EKHR21

Master thesis (15 credits ECTS)

June 2010

Supervisor: Prof. Jonas Ljungberg

Examiner: Lennart Schön

Table of Contents

List of Tables and Abbreviations 4

1.Introduction 6

1.1.Aims and Research Question 7

1.2.Methodology 8

1.4.Disposition 10

2.On the Railways of Growth – Defining the Terms 11

2.1.Literature Review 11

2.2.Infrastructure and Economic Growth Review 13

3.The Many Facets of China - Theory 17

3.1.Theoretical Approach to Railways 17

3.1.1.Beyong the ‘social savings’ 17

3.1.2.Towards Complementarities, Technology and Structural Change 19

3.2.Theoretical Approach to Economic Growth and Technology 22

3.2.1.Understanding China’s Reform 23

3.2.2.Understanding China’s Technological Development 26

4.Empirical Analysis and Discussion 29

4.1.Step One – What is Driving China’s Railways: Drivers and Major Growth Area 30

4.1.1.Drivers 31

4.1.2.Major growth area HSR 35

4.2.Step two – HSR and Technology Transfer 40

4.3.Putting Pieces Together – Railways and Economic Growth 45

5.Conclusion 48

Bibliography 50

List of Tables

Table 1: Four Stages of Long-Term Infrastructure Life-Cycle

Table 2: DGP and Employment by sector (%)

Table 3: China’s Top Urban Networks

Table 4: Number of Chinese cities by size, Polulation’000.000

Table 5: China Railway Transport Average Annual Growth Rates for Freight/Passenger Traffic (%)

Table 6: Transportation of Passengers and Freight (%)

Table 7: China’s Growth Indicators 1978-2006

Table 8: China’s Railway Network Expansion

Table 9: China’s Railway Expansion 2009- 2010‘000km

Table 10: Global Stimulus Packages

Table 11: Break-down of the Government Stimulus Package

Table 12: Biggest China’s companies and ownership structure

Table 13: Planned routes and global share of China’s HSR (%)

Table 14: CHR Technology and local partner

Table 15: Joint Ventures between Major and Chinese companies

Table 16: CNR and CSR orders to foreign partners

Table 17: Train Orders and Technology Transfer

Table 18: China’s Railway Expansion and Development of Technology

Abbreviations

CNR – China North Locomotive and Rolling Stock Industry, or CNR Group

CSR – China South Locomotive & Rolling Stock Corporation Limited

MoR – Ministry of Railways (China)

HSR – High Speed Railway

v-HSR – very High Speed Railway

CCG – China’s Central Government

FYP – Five Year Plan

UIC – International Union of Railway

CHR – China Railways High-speed trains

1.  INTRODUCTION

Infrastructure typically refers to physical and electronic systems that enable production, movement of goods, services, labor and information. Transportation infrastructure is a key physical condition that secures access to markets. Well-established transportation networks make it easier for people to move around and for resources to be relocated at a decreased amount of time. They optimize the efficiency of an economy and create new markets and opportunities. Historically, railways have played a crucial role in the development of today’s biggest economies.

This research speaks about railways in terms of speed, technology, innovation and economic progress. It focuses on the qualitative analysis of the Chinese railway industry inquiring what kind of effect railways may have on China’s economic growth in terms of technology. It departs from a theoretical assumption that not only do the expanding railways have an ability to contain economic growth, they also can have a potential to complement other aspects of economic growth, such as accumulation of technology stock.

Infrastructure investment today is one major trend in the development of emerging economies. It is used to balance and stimulate economic growth. In China infrastructure investment has been a policy matter for the last couple of decades. Infrastructure expansion, railways in particular, has been studied from different perspectives mainly with regard to meeting naturally growing demand of accelerating and unevenly developing economy.

The complementary impact of railways on economic growth in terms of technology transfer that happens in the industry with the latest developments such as the High Speed Railways in China, however, is less tightly overseen. This research looks closer into this process and suggests that through its remarkable railway industry, particularly High Speed Railways, China has been exposed to massive technology transfer that allows it to gradually increase own technology stock, potentially upgrading the quality of China’s economic growth.

China is a booming economy that comprises 6% of global economic output with a geographical stretch of 9.6 million square kilometers with over 1.3Bn citizens, which is approximately 20% of the global population. Measured in gross domestic product (GDP) China has been growing by around 9% annually since the 1978 economic liberalization reforms. Even the recession-hit year of 2009 demonstrated an average of 8.7% GDP growth, stabilizing China on the path to supersede Japan as the second largest economy after only the United States by the end of 2010.[1]

Despite the economic recession in the developed world, China demonstrated remarkable growth backed by the 2008/9 stimulus package and increased bank lending.[2] Notably, the government allocated $317Bn of the total $585Bn economic rescue plan to the development of infrastructure.[3] The state has steadily supported rail expansion for the last few decades, especially so since the 10th Five Year Plan of 2001.[4] Yet, China has the most over-utilized railway network transporting over 20% of the global traffic on 6% of global network lines.[5] Through 2009 China invested approximately $87.8Bn in railways following the goal to increase its network to 120.000km by 2020 led by the two largest domestic suppliers CSR Group and China North Locomotive and Rolling Stock Industry.[6]

The breadth and depth of the Chinese approach to infrastructure development is unprecedented – what took the US a hundred years to accomplish China is aiming to squeeze into a couple of decades. China’s most remarkable ambition is to build the world’s largest High Speed Railway network that by the end of 2012 would comprise 13.000km of high speed rail in comparison to today’s figures of 3.300km in operation, subsequently growing to 18.000km in 2020.[7] Today, China has the world’s fastest operating bullet trains built with most sophisticated technologies, which run with a maximum speed of 350km/h.

As a saying goes in Guangzhou, the third biggest city after Beijing and Shanghai and the largest transportation hub located in the southern China by the Pearl River: over a day, one could board a train to have lunch at historic Mount Yuelu in Changsha, dinner at the famous Yellow Crane Tower in Wuhan and return home to Guangzhou by bedtime.[8] For Europeans, this is roughly equitable to boarding a train in Paris for dinner in Milano with a lunch stop-over in Genève and back to own bed in Paris.

1.1.  Aims and Research Question

The study is based on the analysis of China’s railway industry, which is firmly led by the government. It concentrates on the complementary effect the railways may have on China’s economic growth in terms of technology. It looks for the qualitative evidence of technological value-added to China’s economic growth through the expansion of railways. It departs from the assumption that not only do the expanding railways have an ability to contain economic growth, they also can have a potential to contribute to other aspects of economic growth, such as the increase in the share of technologically-driven sectors.

To that end, the main aim is defined as: to explore whether there is evidence that railways lead China towards technology-led growth, if so, how does this process occur.

Significant conclusion of the study is that the railways do have a relative complementary effect on China’s economy in terms of technology-led growth. Railway expansion facilitated the development of China’s major technology-led growth area – High Speed Railway. HSR yields an increased demand for technology whilst commercializing the railway industry. It attracts new partnerships, through which massive amount of technology transfer with the biggest local railway equipment supplier occurs.

As an outcome, China’s domestic supplier becomes more independent and capable of innovation, which has already been used to manufacture new trains ahead of the international partners. To that end, by investing into railway infrastructure, China is profiting not only in terms of meeting natural geographical and socio-economic needs but also is, to a certain extent, moving towards the next phase of the resource-efficient economic growth.

This study contributes to a vast landscape of research on the role of technological development in China’s future. It is premature to claim at this stage that a clear-cut explanation to this process could be found, yet it is necessary to look for empirical evidence and to expand our stock of knowledge of where China seems to be moving. Broader view demonstrates that recent development of China’s railway industry bares enormous potential to influence not only China’s own competitiveness and economic sustainability, but also global industry as a whole.

1.2.  Methodology

Railway expansion is a moving target, the analysis of which with regard to China’s economic growth is subject for exciting research, the longer the temporal perspective the better. To that end, qualitative empirical analysis of China’s railway expansion policies and their outcome was chosen as ideally serving the purpose of particular research to analyze current trends in the railway industry.

The analysis is explorative and benefits from an open, non-linear inductive perspective[9] designed to highlight new elements and detect causalities[10] in the relationship of railways to China’s economic growth. It relies on one mere assumption that railways may have a complementary effect on China’s economy in terms of technology and proceeds to explore whether, and in what way, this process may or may not occur.

While quantitative evidence is generally characterized with more accuracy and credibility, qualitative analyses essentially seek for probabilistic arguments to explain the data with the help of theoretical observations.[11] Departing from Schön’s framework for economic complementarities, the study essentially looks for movement of technological progress along the axis of railway expansion. The analysis is necessarily illustrative and interpretative, and is not intended to make definitive judgments but rather to contribute to existing theories with innovative perspective.

The research question is multidisciplinary in nature. Therefore, the data for the empirical analysis is necessarily derived from amassing a variety of qualitative sources and quantitative aggregates on railway expansion. It is, therefore, a secondary analysis,[12] which relies on descriptive statistics.[13] Putting together aggregates of quantitative and qualitative data, in Schumpeter’s words, leaves the author in danger of entrapment of aggregate figures that “conceal more than they reveal”.[14] Yet, aggregates have to be valued for their best services – revealing occurrence of movements as a matter of fact, on the basis of which their possible direction could be assumed.

The researcher also takes into account that using secondary analysis and working with aggregates is challenging due to the fact that even misinterpreted statistics can sometimes be taken for granted, thus, the study reasons, observes and avoids sources potentially more inclined to dubious or misinterpreted statistics.[15]

Qualitative data and statistics for the analysis is provided by China’s Ministry of Railways, China’s Statistical Yearbook, China Railway Construction Corporation Limited (Mid-to-Long Term Railway Network Scheme), Bernstein Research 2010, International Union of Railways (UIC), Asian Development Bank, as well as on-line newspapers China Daily, The Financial Times, Spiegel. Where the information was incomplete or not available, the data was looked up in the corporate reports and financial statements on the websites of related companies.

Due to the language barrier, thus the challenge to access important data from the Chinese websites, some of the information may have been left out. The available data was assessed against reliability and trustworthiness criteria to increase general reliability of the study.[16]

In projecting the study of railways onto China’s economic growth, the limitations of the analysis imposed by the interest to study merely the railway expansion policies and their outcome, are necessarily being taken into account. Thus, the analysis serves best for what it is intended - to demonstrate the qualitative evidence of technological value-added in China’s economy - increasing general validity of this particular study[17].

1.3.  Disposition

The next section proceeds with creating the context of the study. It clarifies the concept and provides a brief overview of China’s transportation infrastructure. Second step introduces the theoretical framework. It puts together the potential impact of railways on economic growth and a broader framework of China’s economic development with the role of technology in this process. Complementarities were chosen as serving ideally the goal of this particular research. Finally, section four closes with the presentation of empirical findings and concludes with the discussion of the results.

2.  On the Railways of Growth – Defining the Terms

This study puts together two analytical elements: China’s expansion of railways and China’s economic growth. The subject of inquiry is whether there is a link between railway expansion and economic growth in terms of technology, and if so, how does this merger occur. The first step is to create the context of the study. The following section will start with a brief overview of China’s transportation infrastructure.