July 25, 2011 / 2:35 AM / 6 years ago

Train crash could curb China rail equipment exports

<p>Rescuers carry out rescue operations after two carriages from a bullet train derailed and fell off a bridge in Wenzhou, Zhejiang province July 24, 2011.Aly Song</p>

HONG KONG/BEIJING (Reuters) - A deadly train crash in China over the weekend has raised concerns about the safety of the country's fast-growing rail network and threatens to undermine its plans to export high-speed train technology.

The concerns were enough to push share prices down in Chinese rail companies by as much as 16 percent.

"I think since 2008 China has experienced what we call a 'great leap forward' of railway construction," said Ren Xianfang, a senior analyst at IHS Global in Beijing. "We've long had suspicions that this speed of construction is unsustainable."

Ren cautioned "there are lots of systemic fault lines with China's management of the high-speed train network", which have resulted in under-investment in the software infrastructure.

"So even though we have very rapid build-out of physical infrastructure, the software management has not kept up," Ren said. "This accident overall has changed the perception of everything related with China's high-speed railway, high-speed track and high-speed trains."

China fired three senior railway officials a day after Saturday's crash between two high-speed trains, which killed at least 36 people in the country's worst rail disaster since 2008.

The central propaganda department issued directives to media on Sunday for coverage of the accident, demanding journalists not question official accounts of the crash, which fueled public anger and raised suspicions about conflicting details of the accident, such as the death toll.

A spokesman for China South Locomotive, which built both trains, one of which was manufactured as part of a joint venture with Canada's Bombardier, said signaling operations were to blame for the crash.

"The quality of the trains is fine. Neither had any accidents previously. It's the signaling system that went wrong," he said.

Bombardier said it did not supply the signaling equipment on the line where the accident took place.

HIGH-SPEED AMBITION

China has been working for years to develop a high-speed rail network to rival Japan's famed bullet trains and use the technology it has acquired or developed to sell its own trains abroad in an effort to move up the value chain from producing mass market goods to being a high-tech exporter.

Under Beijing's five-year plan to 2015, the country will invest between 3.6 trillion and 4 trillion yuan ($540 billion to $607 billion) in its rail sector.

Japanese bullet trains, operated by JR Tokai, JR East, JR West and unlisted Kyushu Railway, have not had any accidents involving injuries or deaths since they started running in 1964, said Hideaki Tanaka, an official at the railway bureau of the transport ministry.

Japanese operators have installed the Automatic Train Control (ATC) system on bullet trains, which automatically brakes if trains approach too close to one another, said a JR East spokesman, who declined to be named due to company policy.

In Germany, 101 people were killed in a high-speed train crash in 1998. That disaster, Germany's worst in half a century, was caused by a fatigue crack in one wheel, which caused the train to detail.

China has one of the highest-density rail systems in the world, according to Michael Komesaroff of Urandaline Investments in Australia.

"The Chinese are running at least two times the level of anyone else in the world. That means signaling and systems management become more critical," Komesaroff said.

The crash is a further blow to China's high-speed railway ambitions after the country's railway minister was sacked earlier this year and became the subject of a disciplinary investigation over corruption.

"The markets were concerned about possible slowdown of high-speed railway construction when the railway minister was sacked," said Du Jun, an analyst with Shanghai Securities.

"The accident might have some impact on export of the high-speed rail as overseas clients would obviously have doubts on quality and safety issues. However, it's a bit too early to draw any conclusions before they find out what exactly went wrong."

SHARES TAKE A HIT

Shares of China South Locomotive fell as much as 16 percent to a 12-month low of HK$5.85 before ending at HK$5.98. Shares of China Northern Locomotive, which dominates China's train equipment market with CSR, fell 9.7 percent in Shanghai.

Shares of Zhuzhou CSR Times Electric, a train-borne electrical systems and electrical components maker, were down 14 percent. China Automation Group, a safety and critical control systems provider, fell 19 percent while China Railway Group, an infrastructure construction firm, lost 6.7 percent.

Bombardier, the world's No. 1 train maker, was down nearly 6 percent at one point in Toronto, which was "a significant over-reaction," Cameron Doerksen, an analyst at National Bank Financial, said in a note to clients.

"Even if 100 percent of all Chinese high-speed rail-related revenue was to disappear for Bombardier (an extremely unlikely scenario), we estimate the EPS impact at only $0.03," he said.

He added that while China is an important growth market for Bombardier, it makes up less that 10 percent of the rail transportation division's revenue and less than 5 percent of all of Bombardier's total revenue. Bombardier also makes commercial aircraft and business jets.

Shares of Chinese airlines gained sharply as investors hope more travelers would take to the sky after the train crash.

Air China rose more than 3.5 percent while China Southern Airlines and China Eastern Airlines gained 3.4 percent and 4.7 percent, respectively.

Reporting by Alison Leung and Anne Marie Roantree in Hong Kong and Fang Yan in Beijing; Additional reporting by Yoko Kubota in Tokyo and John McCrank in Toronto; Writing by Charlie Zhu and Matt Driskill, Editing by Jonathan Thatcher and Sugita Katyal

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