Despite the recent record-breaking travel demands during major holidays, China's overall public transportation system still faces substantial debt. Is China's transportation investment financially sustainable over the long term?

When we look at the public transportation system, we are not only considering the high-speed railway system in China, but also the subway system in a city and even the buses. In many cities around the world, not just in China, the public transportation system is losing money in the strictest accounting sense. If we are looking at their books, their profits probably cannot cover their maintenance costs, and the interest and principal payments for the bank loan at the start of construction.

But we also need to keep in mind that public transportation has greater “social service functions.” The profit generated from the ticket sales is only part of the consideration. For example, in China, the high-speed railway provides a much more convenient and faster way to travel compared to traditional buses or locomotive trains. When people ride a train from Beijing to Shanghai, it only takes four to five hours, whereas riding a traditional locomotive train can take up to 12 hours or more. Travel by high-speed rail can save time for travelers. If the average hourly wage of Chinese workers is 50 or 100 yuan — the saved time represents an enormous social benefit, let alone the potential reduction in carbon emissions. Otherwise, travelers would be traveling by car or by airplanes, both of which account for a high social cost for the society as a whole.

Because of the other long-term benefits of public transportation, governments around the world subsidize public transportation. As people travel using public transport such as high-speed railway, they are able to earn more, and their companies are able to make more profit. As a result, individuals and companies are paying more tax to the government. The government then uses part of that tax to subsidize public transportation. It is very difficult, in fact, for the public transportation per se to make a net profit. Yet, if we look at the entire society which benefits, then we are potentially seeing a sustainable, profitable equilibrium.

As for China’s high-speed railway system, currently only a few lines are achieving a net profit, like the Beijing-Shanghai High Speed Railway (京沪高铁) and the Guangzhou-Shenzhen intercity high-speed railways. These two lines have very high passenger volumes, and so the government is now planning a second parallel line because the current line is at maximum capacity.

The World Bank in 2019 analyzed the development of China's high-speed railway, and calculated the potential social benefit of these high-speed railways in addition to the lower carbon emissions and all the other associated benefits. They found that the major arterial lines that connect large population centers in China, such as the Beijing-Guangzhou or Shanghai-Kunming high-speed railways, are making a profit at a return on equity of roughly 5% to 10%.

How has the expansion of China's transportation network affected disparities between urban communities and rural communities that are not connected to HSR? If people were to travel between urban communities, they would sacrifice less time than if they were traveling between rural communities. How has the expansion affected such disparities?

High-speed railways are not what we call the “door-to-door transportation.” You don’t expect to find a station in front of your home door.

Here is some background knowledge: China has 2,800 counties. On average, we're talking about 400,000 people living in one county if you divide 1.4 billion by 2,800. In one county, there can only be one high-speed railway station. Other public transportation methods, such as buses or subways, are still needed to connect you from your local community to the high-speed railway station.

Overall, economists have found that places with high-speed railway stations observe a significant increase in the rate of urbanization. The nature of high-speed railway is such that it often travels in one direction and cannot take many detours. They can’t have much curvature in their paths. Therefore, for many counties, they can only build their stations in very remote places. Once these high-speed railway stations were built, the surrounding areas will experience rapid urbanization, with commercial centers and residential compounds built around them. When scholars and economists looked at satellite images of nighttime luminosity in counties with high-speed railway stations, they saw an increase in nighttime luminosity after the high-speed railways were constructed in these counties.

But there is also another side of the story. Once the network forms and connects both large cities and smaller counties or cities, there is a drainage effect — that populations are now more likely to concentrate in large cities. Take the example of the Beijing-Tianjin intercity high-speed railway. Traditionally, if you drive by car, travel from Beijing to Tianjin would take roughly 90 minutes to two hours. But with the Beijing-Tianjin intercity high-speed railway, you can conveniently travel between cities in under 30 minutes. The implication for this scenario is that now people can work in Beijing and spend their nights in Tianjin. This would mean many work opportunities will flow to Beijing. The taxes companies pay will flow to Beijing and cities like Tianjin become bedroom cities. In this scenario, Tianjin is still a major city in China. Yet you can imagine in provinces like Hubei, there is the super city Wuhan and numerous smaller cities, like Huangshi that surround Wuhan with only around 20 to 30 minutes of high-speed railway transport. Many good job opportunities will be further absorbed into large cities because people can now commute between where they live and where they work.

Your book suggests that HSR construction can generate substantial benefits for localities with a station, a railway passing through, or both. How does the relationship between the local government and the provincial government (or the central government) in China affect construction decisions?

Ideally, in the high-speed railway case, the decision to locate a station must be made by the central government. Why? Because eventually, the entire network is operated by the central government. If each province operates their own railway line, then you can imagine there are going to be a lot of problems because the railway lines travel across multiple provinces. That is why the central government must step in and operate the China Railway Cooperation. The central government made the final decision on where to allocate these stations. Ideally, the decision to locate the station should be determined by passenger needs — if in one place many passengers need this transportation method (HSR), the central government then is going to invest.

But the issue is the information policy. In reality, the local government plays the role of transmitting the so-called constituency or the public demand to the central government. Oftentimes, what Chinese local governments, either the cities or the provinces, will do is that they will send reports to the central government saying that our locality needs this railway station because our people are in dire need for better transportation infrastructure. But you immediately can see the problem here. Everyone can say they need this transportation method, and there's very little way for the central government to verify whether this claim is genuine, inflated, or even fake. Eventually, it's up to the local government whether they can successfully forge a consensus among multiple central ministries that all had some authority over the approval of the high-speed railway. If some localities were very good at lobbying these ministries and forging consensus then eventually, they were rewarded these stations.

In the book, I detailed some strategies localities use to enhance their bargaining power and produce a more favorable outcome for themselves. For example, in some extreme cases, local governments would even encourage their residents to go on protest. We all know that the Chinese local government values social stability. But in this extreme case, they will even turn a blind eye to people who protest for high-speed railway stations because they believe this can send a very costly signal to their superior. As we just talked about, because sending a report to the central government is not difficult, and the signal is very noisy, the central government cannot tell whether a locality really needs a high-speed railway station or not. But somehow, in your jurisdiction, if you have people gathered together, chanting slogans like “We need a high-speed railway station,” it will send a very costly and very genuine signal to your superiors that the demand for a high-speed railway station is real.

In chapter four of your book, you explain that cities with dual appointments, where officials hold positions in both provincial leadership and local leadership, are more likely to receive attention in provincial policy plans, and those cities are therefore more likely to be chosen for infrastructure projects, such as building HSR stations. Do you believe that China, when making decisions regarding dual appointments, which have enormous power to transmit data to the central government, places greater emphasis on a city's current economic conditions, its historical significance, or both?

The short answer is yes. These dual appointments are not assigned randomly. Dual appointments not only exist in territorial government, but they also exist in every other form of Chinese bureaucracy. For example, in a city government, the police bureau chief is oftentimes also concurrently appointed as the deputy mayor of the city. Similarly, at a university, the dean of the medical school also has a dual appointment as the vice president of the university because medical schools often have a very large research budget and an extensive staff. By giving the dean a dual appointment at a higher level, he or she is able to better manage their responsibilities. In China's territorial government, that's also the case.

Which cities are getting dual appointments? Among the 31 provinces in mainland China, every single provincial capital's party secretary receives a dual appointment in the provincial leadership. It's slightly different from the U.S. because, for example, in California, Sacramento is not the largest city in California. You have Los Angeles, San Francisco, and San Diego. These cities have greater populations and economic activity. But in China, in almost all provinces, the provincial capital is the place with the largest population and economy. It generates the most revenue and hosts the most important institutions.

In my quantitative analysis, I include a set of control variables. Knowing that these dual appointments are not assigned randomly and tend to be given to places that already have greater importance, I can use statistical methods to artificially make them appear similar in these dimensions to other places. I'm accounting for whether a place has a larger population, a greater GDP, or generates more fiscal revenue for the provincial government. Holding these constants and presuming that these places are the same in these three dimensions as the other cities in the province, I can determine whether having a dual appointment in the provincial government can generate more favorable policies for the cities. I found a positive effect.

What does that mean? In the Chinese system, the winner gets more resources. Places that are already well resourced and economically powerful can use their advantageous positions to obtain even more resources. In other words, these findings help explain why we are seeing a widening regional gap in China. It answers why central cities are often becoming increasingly prosperous, while more marginal places are losing population and their economies are stagnating. This could be one of the institutional mechanisms that explains that trend.

To what extent do you believe that China's investment in transportation infrastructure serves as a means of projecting soft power internationally?

I do not believe soft power was the government's goal from the beginning. When the Chinese government started the program in 2004, the institution responsible for managing China's high-speed railway program was the Ministry of Railways. This ministry was not responsible for China's international relations, unlike the Ministry of Foreign Affairs or the Ministry of Commerce. The institution was only focused on its own departmental interests, like whether it could get more state investment or whether its ministers could get more recognition from State Council leaders and renovate the railway system.

However, as China's railway system has grown and received international media attention, I do believe it has become an important tool for promoting China's international influence. For example, China's high-speed railway construction in Southeast Asia, in both Cambodia and Indonesia, follows exactly the model and technical parameters of the railways in China. China's railway companies are also competing with Japanese and European firms on their high-speed railway programs in Vietnam and India. However, it was only when China's railway system became mature and received positive international exposure did it become a symbol of China's soft power.