The Chinese state goes to great lengths to stop Uighur Muslims in the country's far west from taking part in the great hajj pilgrimage, denying passports to most and forcing others to travel in tightly controlled groups. But more than 2 million Muslims from the rest of the world who are now converging on Mecca have reason to thank Beijing.
Specifically, they can thank the huge, rapidly growing and grossly inefficient mix of opaque politics and state-dominated business known as "China Inc" which has just delivered a dual-track monorail linking Mecca to the holy sites of Mina and Mount Arafat.
The 18-kilometre line opened at the weekend in time to ease the transport bottleneck that begins each year on the eighth day of the Muslim calendar month of Dhul Hijjah. Construction took just 16 months. It will soon be able to handle 72,000 passengers an hour.
Saudi Arabian taxpayers have paid a steep discount to what they would to any non-Chinese builder, thanks to a hidden $US600 million subsidy from the Chinese contractor. But the best part about it, from Saudi Arabia's point of view, is that there are no strings attached. All this Chinese largesse was never meant to be a gift. It was a politically driven stuff-up, from beginning to end, in what was advertised as a commercial deal.
China Railway Construction Corporation was once the railway arm of the People's Liberation Army and now builds more than half of China's railways. In 2008 it listed $US5.7 billion worth of shares in Hong Kong and Shanghai, in a float jointly managed by Macquarie Group, and put the investment bank on the map in China. But most of its shares and all of the ultimate control is in the hands of the state.
The Mecca monorail deal was negotiated at the political level and it doesn't appear that the company had much say in it before being announced by China's President, Hu Jintao, and Saudi Arabia's King Abdullah in February last year. Reporters from the Economic Observer, an independently minded Beijing newspaper, have revealed the limitations of the "China Inc" model in uncomfortable detail.
"Zhao Guangfa, president of China Railway Construction, said internally that this project was more a political mandate than a commercial project," the Economic Observer says. "Failure was not an option."
The Mecca railway was not the company's first political project. But previous ones had all been with weak states, where China had all the bargaining power to insist on importing Chinese labour, appointing Chinese subcontractors and using Chinese-style measures to push through regulatory problems and community objections.
Saudi Arabia took advantage of China's political need to be seen to be delivering a service to the world's Muslims and it drove a hard bargain. It insisted on developed world standards, nominated its own subcontractors, dragged its feet on relocating residents and constantly moved the design parameters. The amount of earth to be shifted in construction rose from 2 million cubic metres to 5 million.
Company insiders blamed the capriciousness of their Saudi client and also Beijing's political insistence to get the project done on time at any cost. But they also conceded that practices that make money for the company in China and in Africa don't work everywhere.
"The core reason still lies in the CRC's inadequate evaluation of potential risks," the Economic Observer says. "But the root of the failure lies in the crude organisation and working habits the CRC formed when constructing railways at home."
The Economic Observer says this is the worst loss incurred by a Chinese company going abroad. More accurately, it's one of the worst losses that have been transparently disclosed. Others are in worse financial trouble, including in Australia.
China Railway Construction's prospectus lists the usual palaver about possible risks - "inclement weather, technical difficulties" - and contains the usual silence about risks that really matter to Chinese state-controlled enterprises. Nowhere does it mention the risk of management incompetence or corruption or the occasional need to implement "political" decisions from above regardless of commerciality.
Perhaps that's why Hong Kong investors were surprised when China Railway Construction revealed on October 25 its $US1.8 billion Mecca railway project was likely to suffer a $US600 million loss. They stripped 14 per cent off the company's market capitalisation in one day.
The real losses, of course, are incurred by ordinary Chinese citizens who subsidise China's state-controlled enterprises but get no say in running them. For these billion-odd taxpayers, paying a $US600 million subsidy to one of the world's richest societies is just another version of a pattern that gets played out in China every day.
Frequently Asked Questions about this Article…
What was the Mecca monorail project built by China Railway Construction Corporation (CRC)?
The Mecca monorail is an 18-kilometre dual-track line linking Mecca with Mina and Mount Arafat. Built in about 16 months, it can eventually handle up to 72,000 passengers an hour and was delivered by China Railway Construction Corporation (CRC) in time for the annual Dhul Hijjah pilgrimage.
Why did the Mecca rail project produce a large reported loss for China Railway Construction Corporation?
CRC revealed the US$1.8 billion Mecca railway was likely to suffer a roughly US$600 million loss. The Economic Observer and company insiders say the deal was politically negotiated at the highest level, carried out under pressure to finish on time, and involved difficult site changes and client demands that increased costs.
How did investors react when CRC disclosed the likely US$600 million loss on the Mecca project?
Hong Kong investors responded quickly: when CRC disclosed the likely loss on October 25, they knocked about 14% off the company’s market capitalisation in a single day, reflecting surprise and concerns about the company’s overseas project risks.
What does the Mecca monorail story tell everyday investors about risks in state-controlled Chinese companies?
The project highlights risks that may not be obvious in prospectuses: political mandates, state-driven decision-making, potential management shortcomings and hidden subsidies. CRC’s prospectus listed routine construction risks but did not spell out the political or governance risks that helped create this loss.
Was there a subsidy or hidden cost involved in the China–Saudi monorail deal?
Yes. The article reports a hidden US$600 million subsidy from the Chinese contractor that effectively reduced what Saudi taxpayers paid. That subsidy appears to have been driven by political considerations rather than commercial terms.
How did Saudi requirements and project changes affect construction costs and timelines?
Saudi Arabia insisted on developed-world standards, nominated its own subcontractors, delayed resident relocations and repeatedly changed design parameters. For example, the amount of earth to be moved rose from 2 million to 5 million cubic metres, all of which pushed up costs and complexity.
What lessons should retail investors take from CRC’s Mecca project when evaluating infrastructure or construction stocks?
Look beyond headline project wins. Check for state ownership and political ties, examine whether prospectuses disclose governance and political risks, watch for exposure to large overseas contracts, and remember that practices that work domestically may not translate abroad—especially when projects are politically driven.
Does the Mecca monorail case have broader implications for global investors in China-linked infrastructure companies?
Yes. It shows how China’s state-dominated ‘China Inc’ can produce rapid, large-scale infrastructure but also create opaque, politically motivated deals that carry hidden costs. Ordinary taxpayers may subsidise losses, and shareholders—like those in Hong Kong—can be surprised when such risks materialise.
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