Railway Revolution Builds China’s Consumer Culture

Sunday, May 29th, 2011

Railway Revolution Builds China’s Consumer Culture

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Frequent readers of my weekly articles should be familiar with the story of China’s high speed rails. We’ve previously discussed how China is building the world’s largest network of high speed rails at an incredible speed.

Since opening the first high speed line between Beijing and Tianjin in 2008, the country has laid down more than 4,600 miles of new tracks. This is three times more than Japan, where the bullet train was invented, and this is just the start. Once completed near the end of this decade, the high speed rail system will connect more than 250 Chinese cities, span 18,641 miles and reach roughly 700 million people.

Currently, the high speed rail network connects about one-third of China’s cities. That figure is set to nearly double over the next two years. If current forecasts hold true, 100 percent of the China’s cities will be connected through high speed rails by 2019.

While linking megacities such as Beijing and Shanghai carries significance, connecting the urban East with rural areas of West and Central China is equally as important. This data from Morgan Stanley shows that the West and Central regions of China lag considerably in terms of GDP per capita, urbanization rate and property prices.

Many, including our investment team, believe that connecting these areas of the country could have a similar effect to what took place in the United States when Eisenhower’s interstate highway system linked cities such as Chicago and Philadelphia with their counterparts on the West Coast including Seattle and San Francisco.

The effect this massive buildout can have on commodities is evident: thousands of miles of new track, hundreds of new stations and dozens of new trains will certainly boost demand for steel. But there’s also a corollary effect that can expedite the transformation of China’s economy. More people traveling across the country means there will need to be more places for them to eat, sleep and shop.

Take hotel rooms for example. Currently, the U.S. has just fewer than 5 million hotel rooms spread across the country; China has about half that amount. However, Morgan Stanley forecasts that the two are set to switch places near 2025 as China pushes to offer more than 9 million hotel rooms by 2039. Familiar names such as Wyndham, Starwood and Hilton are planning major additions to their pipelines in China.

Morgan Stanley also says that the high speed rail expansion presents opportunities in areas such as consumer staples, car rentals and tourism. The latter is especially important because the average Chinese citizen is going to be able to explore culturally rich areas of the country that were previously too difficult or expensive to visit. A poll from CLSA’s China Reality Research last year showed that travel remained a top aspiration.

Rail passenger traffic has a strong correlation with instant noodle consumption (79 percent positive correlation) and soft drink volume (86 positive correlation), according to Morgan Stanley. This means that chains such as McDonald’s (1,300 stores in China) and KFC (4,000 stores in China), both of which are largely concentrated in the eastern third of the country, will likely follow the high speed tracks into Central and Western China.

These are all examples of how the dynamics of the Chinese consumer are forever changing. As investors, it’s important to understand these intermarket relationships and how a development in one area of an economy can dramatically affect another seemingly unrelated area of the economy. Being able to spot these trends and developments before they bubble up to the surface is how active money managers can create alpha for their shareholders.

Tags: Bullet Train, Central China, Central Regions, Chief Investment Officer, China Railway, Chinese Cities, Consumer Culture, Corollary, Frank Holmes, Frequent Readers, High Speed Rail, Interstate Highway System, Investment Team, Morgan Stanley, Regions Of China, Speed Line, Tianjin, Track Hundreds, U S Global Investors, Urbanization Rate
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China’s High Speed Rails

Thursday, November 4th, 2010

This week’s Emerging Markets Diary highlighted the growth of high-speed rails in China, with its recent launch of the line between Shanghai and Hangzhou.  The Shanghai-Hangzhou line now lets passengers shrink their travel time to only 45 minutes for a distance of about 126 miles.

This chart from Nomura International illustrates part of China’s current five-year plan to expand its network of high speed rails. China already has the longest high speed rail system in the world with just under 2,200 miles of track but Beijing has plans to extend its high speed rail lines to a total of 8,078 miles by 2012.  By 2020, some analysts expect the distance of high speed rail lines to stretch 12,427 miles.

Most surprising about this is the speed in which China has been able to lay the tracks. China’s first high speed line between Beijing and Tianjin just opened in 2008 and has already carried 40 million passengers, roughly 125,000 a day.

Traveling at 180 miles per hour, high-speed rails have cut the travel time between Shanghai and Beijing from 14 hours to 5 hours. These trains are also equipped with Wi-Fi and other amenities so businesspeople can continue to work while they travel.

Another large project underway is a rail line to the province of Xinjiang, in far western China. This 1,103 miles high speed rail line is important because it frees up the existing rail line for freight traffic. Xinjang’s 2.9 trillion tons of coal reserves make it one of the richest deposits in China and connecting these reserves with power hungry cities along China’s coast is essential to making sure the lights stay on.

Recently, Beijing has ramped up efforts to develop China’s western regions. The Chinese government has been encouraging urbanization into the country’s interior regions by offering incentives such as tax free zones and building out the region’s infrastructure. Tourism into western provinces has also seen a bump, and retail development for luxury goods such as Hermes, Cartier and others has begun popping up across the western landscape.

This chart first appeared in this week’s edition of the Emerging Markets Diary.

Tags: Businesspeople, China, Chinese Government, Coal Reserves, Emerging Markets, Five Year Plan, Freight Traffic, Hangzhou, High Speed Rail, Interior Regions, Luxury Goods, Nomura International, Retail Development, Speed Line, Tianjin, Travel Time, urbanization, Western China, Western Provinces, Western Regions, Xinjiang
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