HEAVY BLOW: Pictured is a bullet train assembly line of the CSR Corp. Ltd. The Wenzhou train crash is expected to have a negative impact on the company's equipment and technology exports (LI ZIHENG)

Financial strains

Meanwhile, worries have been abounding about the debt sustainability of the MOR since the accident may hinder its ability to finance future projects.

In a move to fund massive high-speed railway projects, the MOR has taken on a mountain of debts. By the end of June 2011, debts of China's railway operators, all affiliated to the MOR, had totaled 2.0907 trillion yuan ($324.1 billion), with an asset-liability ratio of 58.53 percent, slightly up from 58.24 percent in the first quarter of this year, according to data from the Shanghai Clearing House, an inter-bank clearing house under the People's Bank of China, the central bank.

The Ministry of Finance and the MOR are the only government departments that can issue direct financing such as short-term financing bills, corporate bonds and medium-term notes.

On July 21, the finance ministry planned to auction short-term financing bills of 20 billion yuan ($3.1 billion) with a yield of 5.18 percent, but only raised 18.7 billion yuan ($2.9 billion). Concerns are rising that the MOR's securities may further lose their appeal to investors due to the deadly accident.

Now, after the recent accident, demand for railway ministry bonds has dropped even lower, said Stephen Green, a Hong Kong-based economist with the Standard Chartered Bank.

"It will be a long time before the MOR returns to the bond market," he added, citing doubts if the ministry's operations can generate enough free cash flow to cover the interest payments on its debts.

"If the ministry is a company, then it already faces the risk of going bankrupt," said Zheng Ruxi, an analyst with the Huatai Securities Co. Ltd. "But it is a government agency, and its bonds are guaranteed by government credit, which provided a cushion against the impact of the train crash."

Zhao Qingming, a senior researcher with China Construction Bank, said the MOR, with solid and stable returns, remains an appreciated customer for commercial banks, and the tragic train collision will not change its credit rating.

His view was shared by Guo Tianyong, Director of the Research Center of China's Banking Industry under the Central University of Finance and Economics, who said the accident will fuel the MOR's risks but won't alter the big picture.

Chain reaction

As China is likely to curtail railway investments, a number of relevant industries may receive a heavy blow, such as those that supply cement, steel and coal. The China Galaxy Securities Co. Ltd. estimated that 700 billion yuan ($108.5 billion) of railway investments could create demands for 30 million tons of steel and 140 million tons of cement.

Bearing the brunt are also a string of railway equipment manufacturers, including China Railway Signal & Communication Corp. (CRCS), one of the contracted builders of the signal system of the Ningbo-Taizhou-Wenzhou Railway, where the crash occurred.

As the state-owned company gears up to debut on the stock market next year, many fret that the accident has cast an ominous shadow over the prospect of its initial public offerings.

In addition, Chinese manufacturers of bullet trains—CSR and CNR—are also expected to suffer painful losses. The two companies are competing for export orders of high-speed trains, technologies and equipment, as well as contracts to make bullet trains overseas. CSR, for example, in December 2010 signed an agreement with the U.S. conglomerate General Electric to make high-speed trains in the United States. Just because of the latest accident, they are experiencing a frustration on the path of expanding offshore.

"The disaster exposed key flaws in China's railway system and it could take 20 years for local train and rail builders to convince foreign buyers their high-speed technology is safe," said Edwin Merner, President of Atlantis Investment Research Corp.

"The accident does not mean the end of high-speed trains, but it will force other countries to think more about whether they really need it and where they get those technologies," said Ingrid Wei, an analyst at Credit Suisse.

Li Xuerong, a senior researcher with the Shenzhen-based think-tank CIConsulting, downplayed the worries, saying "despite the stumbling blocks, Chinese companies will adhere to the significant strategy of going global and lay a solid global foothold."

Meanwhile, the ripple effect of the accident is spreading throughout the economy. "The train crash may damp demand for property in cities along new railway lines," said Credit Suisse, in a report.

"Chinese policymakers vowed investigations into the illegal confiscation of land by local governments in the name of railway and highway development. And the recent accident could trigger a movement that may affect developers' existing land banks," said the report.

The only beneficiary may be airlines, which faced intense competition from high-speed railways. After the Zhengzhou-Shanghai Express Railway came into operation in February 2010, Henan Airlines saw passenger numbers shrink by half and eventually shut down the route in January 2011.

But since the train accident on July 23, the balance of power has been obviously tipping in favor of airlines. As many travelers consider flying a safer option, air ticket prices across the nation have staged a powerful rebound.

"We believe airlines in the short term may regain market shares lost to high-speed railways, as travelers' confidence in China's high-speed railways could take time to rebuild," said Goldman Sachs in a report.

"Over the longer term, however, we expect safety issues to be resolved and, in our view, high-speed railways will still be a competitive and energy-efficient mode of transportation in China," it concluded.

The Wenzhou Accident

On July 23, a serious accident occurred on a viaduct in the vicinity of Wenzhou when bullet train D301 from Beijing to Fuzhou collided with high-speed train D3115 running from Hangzhou to Fuzhou. The first four coaches of the D301 were thrown from the viaduct onto the ground below, while the last two coaches of the D3115 derailed without falling off the bridge.

By July 29, the train crash had left 40 people dead and more than 192 others injured.

Design flaws in railway signal equipment have been blamed for the serious accident. Having been struck by lightning, the signal system at Wenzhou South Railway Station failed to turn from green to red, which caused the rear-end collision, said An Lusheng, Director of the Shanghai Railway Bureau.