Investing in Chinese state-owned enterprises carries plenty of benefits. They are the companies, after all, which are most likely to get the plum contracts, under China’s state-managed capitalist system.
But every so often, shareholders have to bite the bullet. The most recent case cropped up this week when China Railway Construction Corporation (CRCC) revealed it was taking a 4.153 billion yuan ($621 million) hit on a contract to build an 18km light railway line between holy sites around Mecca and Medina in Saudi Arabia. Given the contract was originally signed at $1.8 billion, that’s a 33pc or so overrun.
From the get-go, however, this was clearly a face project. It was China’s first major infrastructure project in Saudi Arabia and Beijing was desperate to cultivate good ties with the oil-rich Kingdom.
CRCC was responsible for design, procurement, construction, installation and testing as well as three years of operation and maintenance on the line.
However, the Saudis apparently changed the plan to boost the line’s capacity and delayed land purchases, adding to the overrun. To make sure the project was finished on time, CRCC bore the higher costs.
Now CRCC is negotiating with the Saudi government for compensation, but it’s a delicate line to tread – Beijing will not want the Saudis to be upset. With its hands tied, there’s not much CRCC can do, and shareholders sent the shares down 14%, the most since the financial crisis, on the news.