What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing over the past decade. China has experienced something of an economic miracle with their gdp, more than doubling to 15 trillion dollars when adjusted for purchasing power parity. They have already surpassed the us to be the largest economy in the world. In absolute terms, however, this growth has not come without its cost.

During this same period, the country's debt to gdp ratio has doubled to almost 300 percent, making it one of the most indebted major economies. Much of this debt has come from private companies such as evergrand, which took on excessive leverage, while real estate prices were booming, but the government has played an equally important role in feeling the debt-driven growth. Over the past decade. The government has invested hundreds of billions of dollars into the world's largest high-speed rail network.

This has boosted gdp statistics and created millions of jobs. However, their obsession with high-speed rail has led to billions of dollars of financial losses and hundreds of billions of dollars of debt. For state-run rail companies, china's high-speed rail bench has been massively inefficient. For example, they spent over 20 billion dollars to build an 1800 kilometer line to the remote xinjiang province.

It is currently operating at roughly six percent of its breakeven capacity. The state-run china railway group is losing tens of billions of dollars per year and has racked up a whopping 900 billion dollars in debt. This is roughly three times the size of evergrand's liabilities. Things have gotten so bad that the government was forced to halt two previously planned high-speed rail developments earlier this year today, we'll look at the economics of china's high-speed rail, why it's losing so much money and whether this will post systemic risk to the chinese economy.

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The goal of this was to facilitate urbanization and economic development. Hsr trains can travel at speeds exceeding 200 miles an hour and can transport passengers across the country in a matter of hours. They offer a superior value proposition to domestic consumers as they're, almost as fast as air travel, but at a fraction of the cost. In the early days, the hsr lines they operated were economically feasible, they had high utilization and most of them were profitable, but this all changed during the global financial crisis of 2008., as financial conditions froze up china's private sector contracted rapidly, with widespread bankruptcies and unemployment.

In response, the government went on an extremely aggressive public infrastructure campaign to create jobs for their hsr development by spending tens of millions of dollars every year to open new lines. The problem with endless government infrastructure projects is that they exhibit diminishing returns to scale. They started off with the most highly trafficked routes connecting major cities such as beijing and shanghai, given how high the population density is, the trains are almost always full and they can more than pay for themselves from the ticket fares. But eventually you get to the point where you've already connected all the major cities from a financial perspective.

This is where you should stay mission accomplished and stop building new lines. But by this point, new hsr construction was a critical part of china's economic growth engine. The state-run china railways directly employs roughly 2 million people. They also employ hundreds of thousands of additional workers indirectly through their suppliers and contractors.

This contributes hundreds of billions of dollars to gdp. Slowing down new construction would necessitate hundreds of thousands of layoffs and likely plunge the economy into a recession. China's top-down economic model, incentivizes government officials, on both the national and local levels to meet high gdp growth targets every quarter and one of the easiest ways to do this is by building more and more government infrastructure projects. The desire to boost economic growth figures have pushed the state-run china railway group to build hsr lines that are not even close to economically viable.

The most obvious case of this is the lan joe xinjiang hsr line. It was constructed between 2009 and 2014, with a total cost of more than 20 billion dollars. Xinjiang is one of the most sparsely populated provinces in western china and is also home to the country's minority muslim population. There is relatively little travel between xinjiang and the more heavily populated areas on the eastern coast.

You can think of this project as the rough equivalent of building a train line from detroit to wyoming. It doesn't make a whole lot of sense. It's been in operation for almost seven years now and has lost money every year. There simply isn't enough demand from travelers.

It is currently estimated that the line has just six percent of the capacity utilization that would need to break even let alone ever make back the 20 billion dollars of investment. The government says they never intended to make money on the project. Its primary purpose was to increase social and economic integration of the xinjiang minority population with the rest of the country, but given how few people are actually using this line, it's hard to see how it could succeed even on that measure, while the xinjiang line is the Most extreme example, most of the hsr projects that china has taken on in recent years have been big money losers. The decades of building new unprofitable railroads have taken a serious financial toll on the state-run railroad company.

As of the end of 2019, china, state railways had 5.5 trillion yuan or roughly 850 billion dollars in debt. This number increased in 900 billion dollars by the end of 2020.. For the first half of 2021, they made a net loss of 8 billion, despite rail travel. Recovering almost all the way back to 2019 levels.

In fact, these numbers actually understate the total level of debt about half of the costs associated with railway construction are financed by local governments, so the total level railway debt is probably closer to 2 trillion. This has led to deteriorating balance sheets of local governments across china. A recent report by goldman sachs estimates, local government's debt to be 8.2 trillion dollars or more than half of gdp. Having already spent so much money on railroad development, many chinese municipalities are struggling to fund the more mundane expenses such as schools, roads and local police departments, and the losses will probably only get worse pretty much.

All their new lines are unprofitable, so the more they grow. The more money they will lose, the ministry of finance will just have to lend them more and more money to pay off their old debts and keep building more trains. China has been investing more than 100 billion dollars per year in railway infrastructure since the 2008 recession. This has led to a situation where two-thirds of all high-speed rail in the world is in china.

This has been great for boosting gdp numbers. In fact, when adjusted for purchasing power, parity chinese economy is in fact bigger than the us, but a significant portion of this gdp is created by government railroads that very few people actually use or speculative real estate development projects in the private sector. The only way to sustain their breakneck pace of growth is to continue building more and more train lines to xinjiang and tibet. It technically boosts the economic growth statistics, but doesn't really do anybody any good and it is not sustainable because, eventually, the economy will collapse under the mountain of debt.

The government knows this and they have been making some efforts to slow down credit growth in the economy. That's why they implemented the three red lines: policy for real estate developers last year. This ultimately triggered the evergrand collapse. They've also started slowing down investment in high-speed rail for the first time in many years there are two types of economic growth, secular and cyclical, secular growth.

Is driven by technological innovation which increases productivity and creates real value for end consumers? This is happening in china with innovative technology companies and electric vehicle companies like alibaba and neo. Cyclical growth is the inflation of debt, fueled investment bubbles in private, real estate or public infrastructure. Cyclical growth has been the main driver of china's economy over the past decade or so. President xi now faces a tough balancing act.

He is trying to gradually deliver the chinese economy. That's why he's refusing to bail out evergrant and gradually scaling back on high-speed rail development, but at the same time, he doesn't want to cause a painful recession with high unemployment, with dozens of major property developers in major distress and 900 billion dollars in debt in the State-Run railroad company - he certainly has his work cut out for him. Alright, guys that wraps it up for this video. What do you think about china's high-speed rail? Do you think the excessive debt could cause further distress in the chinese economy? Let us know in the comments section below as always.

Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.