Rail & Infrastructure

Justified expenses?

China Railway Construction pilloried for huge ‘entertainment’ budget

A family eats shark fin soup at Vancouver's Grand Honor Chinese restaurant in Vancouver

Too much of this going on at CRCC

“Revolution is not a dinner party,” Mao Zedong declared in 1927.

The quote – which is still widely used in China – has resonance today. That’s because dinner parties have become an ideological question for Party leaders once again. Currently the issue is how much money government officials spend on them. As WiC has pointed out in past issues, new leader Xi Jinping has instigated a policy to restrain wasteful spending. In the current climate, even a photo of some empty wine bottles could prove to be a senior official’s undoing (see WiC182)

But how big is the enormous dining bill run up by cadres? One state-owned firm has recently given an inkling of what is being spent.

The 300-page annual report produced by China Railway Construction Corporation (CRCC) usually solicits little public interest. But this month, an item in its 2012 financial statement – suggesting that it forked out Rmb830 million ($135 million) in “Entertainment expenses” – put CRCC in the spotlight.

It all started with a CCTV report. Highlighting CRCC’s case, the state television channel questioned whether state-owned enterprises are following Xi’s austerity push. CRCC’s senior officials at first rebuffed the report as “nonsense”. (The expense in question was less than 0.2% of CRCC’s revenue last year.) But media pressure soon had the powerful railway firm redirecting its public relation efforts.

“We aren’t the only one,” a spokesperson told state radio, painstakingly explaining that entertainment expenses actually cover catering, accommodation, gifts and travel arrangements. The spokesperson went on to beg reporters not to overdo their coverage as the “damage will be too big”.

The plea fell on deaf ears. Journalists set out to hunt down others, with the Beijing News going through 1,720 different annual reports. Their findings? That firms’ spending on hospitality totalled Rmb13 billion in 2012. Insurance giant China Life topped the chart with Rmb1.4 billion in entertainment expenses, according to the China Economic Weekly.

Hong Kong’s media joined the witch-hunt too, with the Apple Daily reminding investors that shareholder money was being lost. In 2012, China Cosco, which has run up the biggest losses of any state firm since 2011, spent Rmb41 million on staging conferences. China Railway, CRCC’s rival, ran up Rmb1.6 billion in “Travel expenses”. Last but not least, an expense item known as “Others” totalled Rmb2.2 billion for CRCC.

These items, the China Business News quipped, made CRCC’s entertainment expenses look like “a side dish in an extravagant feast”. Capital Week even suggested that the costs of bribing other officials could be hidden in these expensive perks.

Then again, some firms now feel penalised for their honesty. After all, it isn’t mandatory for Chinese firms to break down their administrative expenses. By being more transparent, they’ve just attracted flak, which means that Chinese firms may think twice next year before breaking down their operating costs in future.

Meanwhile all the cost-cutting that is now going on at SOEs – as they seek to toe the Xi frugality line – is proving bad news for the consumer sector. This week, China Resources Enterprise said that underlying net profit at its retail operation declined 6% for the first three months this year. The retail conglomerate said the decline was mainly due to the central government’s strict enforcement of “diligence and thrift”.

Kweichow Moutai, the erstwhile liquor of choice for government officials, still reported a 21% increase in first-quarter earnings. But the pace of growth is less than half that of a year earlier.

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