A private company announced Tuesday it had acquired 100 percent of the shares in a state-owned railway company for nearly one billion yuan (US$125 million). They've already bought out the state's 84 percent holding in the 62 km Chunluo railway line.

The Luoding deal is the first major private capital purchase of a Chinese state-owned railway business. 

At a ceremony in Guangzhou, capital of south China's Guangdong Province, Cheng Qingbo, president of the investor, the Shenzhen Zhongji Industrial Company, said it was a good deal and the company expected to retrieve their investment within ten years.

The agreement is considered to be a breakthrough for the policy issued by the central government last July which encourages non-public capital to be invested in railway building and reconstruction.

The Chunluo railway, connecting Yangchun and Luoding cities in Guangdong, was jointly owned by Luoding -- an unprofitable coal carrier -- and the China Railway Construction and Investment Company. Luoding held 84 percent of the shares in the Chunluo railway.

The government-funded Luoding Yongsheng Assets Management Company announced the auction of the Luoding Railway Company at the Guangzhou Enterprises Mergers and Acquisitions Services last month.

According to Cheng the Zhongji enterprise would take on the total debt of the railway company which stands at 793.66 million yuan. Their initial capital outlay is expected to be 40 million yuan and the total investment is likely to be nearly one billion. 

The Chunluo railway came into operation in 2000 but has been handicapped by low freight transport volumes which are not even running at one-fifth of capacity.

However, Cheng is confident about future returns. When the railway is extended 76 kilometers and linked with the national railway grid "the profit margin will be large", he said.

Zhongji will invest 1.5 billion yuan to carry out the extension plan. Established in 1996 they've been involved in the operation of toll roads and bridges.

At the end of last year the company reported total assets of 8.13 billion yuan and a profits of 440 million yuan which "is sufficient to support the construction plan for the Chunluo railway," said Cheng.

According to Cheng 65 percent of the investment will come from loans for which Zhongji has already signed a preliminary agreement with a national commercial bank. Construction is expected to be completed in three years.

"Non-public capital participation in railway construction and operation through acquisition will relieve local financing burdens and offer gains to investors", said Fu Dunan, general manager of the Luoding Yongsheng Assets Management Company.

According to Cheng the policy support from both local and central governments is a key factor in encouraging private companies to invest in and take over state-owned railways.

China is opening up traditional monopoly sectors such as power, telecommunications, railways, civil aviation and petroleum to private investors.

Non-public capital started to enter China's railway freight sector at the end of the 1990s. China's first railway involving non-public shares emerged last April.

Liang Renqiu, a Luoding government official acquainted with the whole takeover process, said that more detailed policies on construction, operation and income distribution would provide the assurances needed to see more non-public capital flow into the railway industry.

(Xinhua News Agency August 23, 2006)