China puts brake on rampant subway building, Moody’s approves

Citing "excessive construction and misconduct in the use of funds", China’s powerful State Council this month instructed local governments to refrain from building subways and light rail systems unless they can truly afford them.

The move has been applauded by ratings agency Moody’s, which said it would help local governments manage their debt and lead to a more sustainable metro sector in China.

On 13 July the State Council issued a circular to local governments calling for "the orderly development of urban rail transit systems to meet the actual demands of cities".

It said cities could only apply for funding to build subway systems if they had annual public budget revenues of more than $4.4bn (30 billion yuan), a regional GDP of more than $44bn, and a permanent urban population of 3 million or more.

Those indicators were halved for cities wanting to build light, overground rail systems.

The circular required the "reasonable planning of urban rail transit networks to ensure that the local government’s expenditures in construction and operation are within financial resources", and called for transparency, reform of finance systems, and a drive to attract private investment.

In a note last week Moody’s praised the policy, which updated previous guidelines published in 2003.

"The policy reduces the financial risk of metro companies, as highly geared metro companies have to suspend construction on new projects, while new projects without specified debt repayment sources will not be approved," said Ada Li, a Moody’s vice president and senior analyst.

It would help local governments contain contingent liabilities, said her colleague, Amanda Du.

They said it would encourage cities and metro companies to diversify funding sources through the use of public-private partnerships (PPPs), project bonds, hybrid instruments, and the securitisation of operating assets.

However, many cities have already bitten off more than they can chew, Moody’s warned.

The company estimated that around a third of the 43 cities with approved metro plans would not meet the new criteria.

Moody’s said the new policy would not affect projects under construction, but said projects approved but not yet started could be deferred, suspended or cancelled.

Image: Subway construction in Shenzhen, China, 2014 (Waihs/Dreamstime)

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