Combination of construction firms would create another industry behemoth

AliWorkers of China Railway Group Ltd at a construction site in Nantong, Jiangsu province. The company is likely to merge with China Railway Construction Co Ltd. [Xu Congjun / For China Daily]

Shares related to China's railway construction companies jumped on Tuesday after a media report of a possible merger between China Railway Group Ltd (known as CREC) and China Railway Construction Co Ltd.

China Railway Tielong Container Logistics Co led gains in the shares of companies that build and supply facilities for railways, rising 9.96 percent to 11.7 yuan ($1.89), while shares of CREC jumped 5.96 percent.

Officials are studying a merger of CREC and CRCC, Wang Mengshu, deputy chief engineer at China Railway Tunnel Group, told China Economic Weekly.

"The government has started to study the issue to prevent vicious competition in the industry," he was quoted as saying. "The combination will not have a direct impact on the Chinese public but will benefit the whole industry and construction projects."

It will also help curb corruption and facilitate fair and technology-based negotiations with the national railway operator, he said.

The reorganization of the rail construction sector is continuing, following the proposed merger of CSR Corp and CNR Corp. That merger has already received shareholder approval, as well as that of the State-owned Assets Supervision and Administration Commission.

The combined CNR-CSR will create a multi-billion-dollar giant, the world's biggest rolling stock producer in terms of revenue, capable of competing with global engineering behemoths, to better serve China's "going out" policy for its high-speed railways, experts said.

Zhao Jian, a professor of rail transportation at Beijing Jiaotong University, said that similar to the merger of China's two biggest train manufacturers, the possible merger in the rail construction sector will reduce competition in the domestic market and strengthen the merged company's competitive position against international players when bidding for overseas contracts.

If CREC and CRCC are successfully integrated, the merged company will take a bigger slice of the global pie, exploring higher valued-added businesses such as land development, he said.

Last year, the Chinese government released guidelines on the management of a fledgling railway development fund open to private investment to help diversify the sources of railway investment and financing.

But the total funds raised so far for the sector is only 20 billion yuan to 30 billion yuan, far from the target of "hundreds of billions", because many private enterprises still have doubts about the development of the rail sector, according to Wang.