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China reforms put railways back on track

CNBC's Matt Clinch

Taking the sky train from Beijing to the Tibetan Plateau, chugging south to the crags of Yangshuo or riding the Red Rooster to the wastelands of the Gobi in western Xinjiang, train lines in China are vast, breathtaking and busy.

However, a loss in market share to other modes of transportation and financial woes for the national operator China Railway Corporation (CRC) mean that reforms are coming. And these reforms - detailed by the government in recent weeks - have led analysts at Deutsche Bank to grow increasingly bullish on the sector.

"We have become more positive on the outlook for rail equipment," Phyllis Wang, an analyst at the German lender said in a research note on Tuesday, adding that spending on equipment could have a year-over-year growth rate of 20 percent between now and 2015.

(Read More: China's economic reforms: What you need to know)

As well as rail projects that are nearing completion, Wang says that reform announcements could lead to changes to railway tariffs, stronger passenger growth and the introduction of private sector investment and improved efficiencies.

"We upgrade the equipment stocks (China South Locomotive & Rolling Stock Corporation and Zhuzhou CSR) to "buy" from "hold", following our significant upward earnings revisions, which are now well above consensus," she said.

"In contrast, we turn mildly more negative on the construction companies. We downgrade CRCC (China Railway Construction Corporation) to "hold" from "buy", but we maintain "buys" on CRG (China Railway Group) and CCC (China Communications Construction)."

On November 15, China finally unveiled much-anticipated details of the long-term economic reforms agreed to at this month's Third Plenum, a key meeting of the country's top leaders that took place the weekend before.

(Read More: China plenum to 'surprise' on reforms: Stephen Roach)

The 60-point reform plan is seen paving the way for sweeping changes in the world's second-biggest economy as it tries to steer away from investment-led growth to a consumption-driven economy. A"383 plan" was also circulated by Chinese government think tanks before the Plenum, which made specific mention of revamping the railways.

Miranda Carr, head of China Research at North Square Blue Oak told CNBC that these reforms are vital as the railway sector was one of the few areas prior to 2013 still operating as an old-style Ministry, encompassing both administrative and operational sides of the business.

"This led to very high levels of inefficiency as well as significant problems over corporate governance, so some level of reorganization was necessary," she told CNBC via email.

(Read more: Economics behind China relaxing its one-child policy)

State-owned enterprise China Railway Corporation has a debt pile of 2.6 trillion yuan, she said, adding that any moves to turn things around need to be well thought out.

"Splitting it up into regional entities, introducing private capital, increasing passenger and freight fees and allowing it to raise funds from selling off land is all beneficial, but there are major issues to overcome," she said.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81

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