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Capacity: China's trains transported 11m people per km last year

The demotion of the Chinese railway ministry two years ago was a precipitous fall from grace. Previously, the ministry had been a colossus bestriding China, with more than 2m employees, its own police force and court system and nearly as much debt as the government of Russia.

Corruption charges against Liu Zhijun, the then railway minister, in early 2011 signalled that Beijing was ready to reduce the power of the ministry. A fatal high-speed  train crash in July 2011  expedited the process.

In March, after careful planning, the government did the deed,  reclassifying the railway ministry  as a bureau under the transport ministry.

The extent of the downsizing became clear a few months later when it was announced that the newly formed state railway administration would be home to 130 employees, fewer than 0.01 per cent of the ministry’s original headcount

Does the drastic cut mean that China’s railway ambitions have also been ratcheted down? The simple answer is no.

The restructuring should instead be a boon, ensuring that those ambitions can be fulfilled more effectively and with less corruption than in the past.

The objective is “to change China’s rail industry from a planned economy to a market economy”, says Patrick Xu, an analyst with Barclays Capital. “The end result will be a greater focus on safety, efficiency and profitability.”

Before taking a closer look at what the restructuring actually entails, it is important to recall the bigger picture: China’s need for more – lots more – railway lines.

Despite vast amounts of investment over the past decade, China’s rail network remains overburdened. It carries 24 per cent of global freight volumes with just 6 per cent of global capacity, according to HSBC. The US rail network, hardly a paragon of efficiency, is twice as big.

As for passengers, China’s railways transported an average of 11m people per kilometre in 2012, more than five times the developed world average and just slightly lower than India’s rate.

The shortage of subways and commuter rail is even more severe. The OECD estimates that average rail density in big urban centres is about a quarter of the global standard.

For China’s 10 biggest cities to reach world averages, the OECD believes another 5,000km of subway lines would be needed – and that is before considering the other 100 or so cities with populations of more than 1m.

“A considerable deficit in provision needs to be overcome,” the OECD wrote in its 2013 survey of the Chinese economy.

Odd as it may seem, eliminating the railway ministry is a crucial step to plugging that deficit. The state railway administration may be much smaller but it is far from the only entity charged with replacing the ministry.

Much more important is the China railway corporation, a newly established company that will be the main national rail operator. This separation of powers – with the state railway administration largely responsible for project approvals and safety standards – will free the China railway corporation to focus on planning and financing lines.

Over time, the corporation will be joined by other rail operators, injecting more market forces into the industry. “The government will not allow there to be disorderly competition right away, but it will gradually develop an orderly, market-oriented competitive framework,” according to Sun Ning, deputy general manager of an advisory firm managed by the China academy of railway sciences.

Confining the state railway administration to a supervisory role has helped alleviate safety concerns. The tragedy of the 2011 bullet train crash, which killed 40 people, exposed the problems in China’s railway push of the past decade. Mr Liu, the former minister, had advocated “leapfrog development”, ordering bullet trains to run at unsafe speeds. China’s trains are now running a little more slowly.

As for the ministry’s legacy of debt and questions about how the China railway corporation would manage the Rmb2.8tn ($456bn) in liabilities have been put to rest. Officials have declared that railway debts are fully backed by the government, making them as reliable as sovereign bonds.

This has cleared the way for the China railway corporation to issue new bonds and increase spending. In the first quarter of 2013, investment in railway infrastructure reached Rmb54.5bn, up 28 per cent year-on-year.

The corporation’s spending power has also been given a boost by the government’s willingness to move to a more market-based system for pricing, especially for freight. This year, Beijing approved a 13 per cent increase in freight charges.

When the railway ministry was closed, people rushed to its former headquarters to take photographs as mementoes of the ministry that had loomed so large in Chinese life. But if the restructuring is successful, rail will play an even bigger role in the China of the future.