We’re about to see what happens when all of China is angry at one arm of their government… The code of silence is broken, secret numbers come out, and the party gives it the cold shoulder. In short, things take a publicly dreadful turn both politically and economically.
We know the basics. The Chinese Railway ministry suffered a terrible embarrassment when two trains collided on July 23rd, killing 40. Stocks plummeted, officials were sacked, and Premier Wen Jiabao was forced to admit that he was too ill to make it to the crash site until days after the accident… or he lied, whichever you prefer to believe.
Now the consequences- first lets start with economics. According to Caixin Magazine, inside analysts are spilling the beans on the real chaos of Ministry debt; Debt which is estimated to be larger than the entire economy of Denmark.
The Ministry says that it banked 4.3 billion yuan in profits in H1 2011. But according to one official, that figure doesn’t include $30 billion yuan in construction expenses it is carrying from the first half of this year alone. And as the year goes on, that number will only grow. The rail network is supposed to span 120,000 kilometers under a 2.8 trillion-yuan, five-year investment plan running through 2015.
But the more pressing issue is the debt that the Ministry is supposed to pay right away.
The analyst told Caixin that even if the ministry stops borrowing, debt repayment plus interest is set to hit 250 billion yuan in 2011, while cash flow from operating activities are not expected to exceed 200 billion yuan.
The Ministry employs more people than the U.S. government, so if cuts are made, it can’t possibly good for Chinese “social harmony.”
Now for the political consequences. According to Bloomberg, the party is thinking about breaking up the Ministry into a regulatory body, and an operating body. Totally shameful for an organisation that has its own court system. And we needn’t remind you that in China, there’s nothing worse than being shamed.
“The ministry’s dual role as referee and market player should be ended,” said Mao Shoulong, a public policy and politics professor at Beijing-based Renmin University of China. “The crash may provide a catalyst for the reform.”
Because of its sheer size, cutting the Ministry in half will be a gigantic headache for the government (if they go through with it). It even controls schools and hospitals.
And just FYI: the yield gap between the ministry’s one-year notes and government debt has more than tripled this year to about 188 basis points. That makes the PIIGS look so, so good.