Chinese State-Owned Enterprises Lose Money in Overseas Adventures
Chinese state-owned companies are spending big around the world—and in many cases losing big as well. Insulated by the state and the industry monopolies they enjoy, these companies are often unable to properly deal with risk. The result is financial losses that no one is accountable for, but for which the public pays all the same.
By last October, the Mecca Light Rail (MLR), a China Railway Construction Corporation (CRCC) project in Saudi Arabia incurred losses amounting to 4.13 billion yuan (approximately US$641.28 million).
The news was announced June 29 on Eastday.net, the online site for Shanghai’s main newspapers. According to the report, China’s state-owned enterprises have recently been increasingly investing overseas.
Because enterprises backed by the state are unable to handle risk properly, projects that suffer losses are often covered by the central government, the Saudi railway project being one recent example.
By the end of 2010 over 15,000 overseas enterprises were started up by Chinese state companies, according to data from the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), reported by Economic Information Daily on June 28. The total assets of those overseas enterprises exceeded US$1 trillion.
And the losses have been big, too. The Economic Information Daily data showed that during China’s 2008 financial crisis, 68 state-owned enterprises, including giants like PetroChina, Sinopec, China National Offshore Oil Corp. (CNOOC) and China Steel Group, suffered huge losses in their foreign business ventures, totaling US$11.4 billion. The monopoly role of the companies in the Chinese economy cushions these figures, however.
In June 2008, China and Saudi Arabia signed their first inter-governmental cooperative project, the MLR. The China Railway Construction Corporation showcased the huge project worth 12.1 billion yuan (approximately US$1.87 billion), as a “landmark project between China and Saudi Arabia” in its 2009 annual report.
The CRCC signed the contract with Saudi Arabia in February 2009, and the project was launched that same month and completed in 16 months. The MLR started operating on Nov. 13, 2010. However, huge losses began only one year after the start of construction.
Although there are local, political and cultural factors behind the losses, a CRCC insider told China’s First Financial Daily in an Oct. 30, 2010 report that the most fundamental reason for the losses is that, when the CRCC and the Saudis signed the contract, it was very loosely written. The CRCC did not make a full estimate of the project’s scope, and crucial details were left ambiguous.
“At the beginning, [CRCC] did not make a comprehensive assessment of the risks involved, nor was there a list detailing the construction work in the contract, so during the construction process, the Saudis kept adding requirements. They even asked to add new functions to the project. Thus, in order to advance the project the CRCC could only lose money,” the insider told First Financial Daily.
Last October after the CRCC found that the huge losses could not be made up; it had no choice but to transfer the cost to the public.
Outwardly Beijing seems to have strengthened its control over overseas investment. On June 27, the body that oversees state-owned enterprises announced two regulations: the management of overseas enterprises invested by state-owned enterprises, and the management for transfer of ownership, which was enforced on July 1, 2011.
Sun Fei, the director of China Overseas Development Center told the overseas version of People’s Daily that he feels the announcement of the two regulations indicates that the person in charge will be held responsible for overseas investment mistakes.
But it doesn’t appear to have played out that way. According to a June 29 First Financial Daily report, in 2009 CITIC Pacific suffered huge investment losses of approximately 15 billion yuan (approximately US$2.3 billion). The chairman of the board, Rong Zhijian, resigned but was not held legally responsible. Rong is the son of Rong Yiren, former Vice President of China.
Read the original Chinese article.