Economy, Talking Point

Problematic (family) trees

Will Bo Xilai scandal derail Chongqing’s bold development plans?

Problematic (family) trees

Unclear days ahead: are the investment prospects for Chongqing still good?

Not usually one for horticultural metaphors, the Global Times went all green-fingered earlier this month. Then again, the ultimate aim was to point the finger more directly at Bo Xilai, the disgraced former Party chief of Chongqing.

The newspaper was taking issue with a tree-planting campaign designed to make Chongqing into a “forest city”, but said to have cost billions of yuan.

One of Bo’s personal projects, the greening effort was included in the performance evaluations of local officials, with 10 million gingko saplings planted on a single day in September 2008 alone.

Today, the story being told is one of hubris and waste. Older fig trees that once afforded shade to city residents were dug up and replaced with gingkoes, shipped in from the mountains of Guangxi and Guizhou at exorbitant prices. But the new trees grew slowly and provided little shade. Non-native to the city, about half of them perished, despite the support of expensive ‘IV bottles’ designed to counter the furnace-like heat of the Chongqing summer.

Predictably enough, before Bo’s fall from power, criticism of the gingko plan was limited.

Since then it has been reviewed with a more jaundiced eye. “Experts say the urban tree campaigns are good examples of trying to do too much, too quickly without understanding the true needs and possible consequences,” the Global Times concluded, inferring a broader criticism of Bo’s style.

Of course, with Bo now cut down to size, his gingko project can expect a rapid pruning too. But stretching the metaphor further, with Bo now gone from the scene, will Chongqing’s investment profile wither away like his gingkoes?

Show me the money…

The media coverage of Chongqing’s money trail currently is more interested in the outbound flow, especially the rumours that the Bo family has managed to stash millions of dollars overseas.

The focus is on the wider family network: for instance, Hong Kong’s Apple Daily newspaper has turned its attention to the activities of two sisters of Gu Kailai, Bo’s wife, who seem to have held directorships in the city. Bloomberg says the two women control companies worth at least $126 million.

There are also unsubstantiated claims in the UK press that Neil Heywood, the British man found dead in Chongqing in November last year, may have helped Gu to squirrel £800 million of assets overseas.

Of course, that doesn’t square up with Bo’s insistence before his ousting that his wife had little interest in business. “She basically just stays at home, doing some housework for me. I’m really touched by her sacrifice,” he told media at the time.

What about inbound investment: will Chongqing lose out?

It seems that Heywood first came into contact with Bo after approaching him in Dalian about investment possibilities in the 1990s, when Bo was serving as mayor of the city.

Since then Bo has cultivated a reputation for wooing foreign capital, particularly investment in a series of ‘pillar industries’ which serve as a key feature of the so-called “Chongqing model” (alongside heavy government spending on infrastructure and housing).

On the surface, at least, it was a model that seemed to be delivering, with Chongqing reporting 16.4% GDP growth last year, double that of Shanghai. Foreign capital made up much of that momentum, with data from the local statistics bureau suggesting more than $10 billion in overseas investment arrived last year, up by two-thirds on 2010.

More than 200 of the world’s top 500 companies now have a presence in Chongqing, according to the Chongqing Daily, with the municipality making a particular name for itself as a manufacturing hub for cars, motorbikes, personal computers and chemicals. Correspondingly, major international firms like HP, Ford and BASF have all picked it as a leading investment destination, as has Taiwan’s Acer.

Hence the efforts to reassure?

Yes, Bo’s replacement as Party chief in Chongqing, Zhang Dejiang, has been doing just that, with a series of meetings and press conferences.

“Chongqing will firmly continue to reform, and maintain the continuity of its policy of opening up [to overseas investment]” he told Acer executives in person this month, according to Chinese media.

Zhang, a Vice-Premier and former Party secretary in Guangdong, is seen as a safe pair of hands. According to the Commercial Times, he was the first senior official to be sent to the site of the Wenzhou rail crash in July last year and is also well regarded in Beijing for his work during the SARS outbreak in Guangdong in 2002.

Will Zhang approach things differently to Bo? He has already said that the current development plans for Chongqing look too “aggressive”, according to China Business Journal, so we can probably expect a slowing in a number of areas.

And although Zhang has worked hard to encourage investment in his former roles (reputedly he has good relations with Taiwanese businesses, which is a positive for Chongqing), he also has a reputation for a more laissez-faire outlook than his predecessor.

That may mean a little less of the state capitalist model, and more space for some of the domestic entrepreneurs who complain to have been squeezed out by Bo under the guise of his anti-corruption campaigns. Certainly, Zhang will have to deal with claims from disgruntled locals that Bo unfairly blocked their businesses or even misappropriated them.

At another investor conference last weekend, Chongqing’s mayor Huang Qifan was also on message, promising that the municipality would deliver “steady growth” for the remainder of the year with an emphasis on continued efforts to attract investment.

That means continuity in Chongqing’s pro-growth policies of plentiful labour, lower wages and lower tax rates, Huang reassured.

Defending much of Chongqing’s business model while also bashing Bo’s former contribution is going to be a difficult balancing act. And Bo’s demise must be particularly uncomfortable for Huang who served as one of his most high profile officials alongside the former police chief Wang Lijun (now Bo’s nemesis, although in disgrace himself, see WiC138).

But with both of his former colleagues now in detention, Huang seems to offer the best option for some measure of continuity in the municipality. Or as the 21CN Business Herald rather less charitably put it: Huang’s dug himself a hole in Chongqing, and now the onus is on him to fill it in.

What’s the early response from overseas firms?

Here the noises are supportive although with so much investment already committed, it is difficult to see how it could be any different.

Ford, for example, hasn’t been discouraged, announcing another new investment in the city – $600 million on new assembly lines for its Changan joint venture – at the start of this month.

The US automotive firm only began production of one of its newest models for the Chinese market – the Focus – at a new $500 million plant in the municipality in February, meaning that Chongqing now counts as its largest manufacturing hub outside Michigan, Bloomberg reports.

On Tuesday Hewlett Packard also signed a deal with Foxconn to make 30 million printers a year in Chongqing.

Acer’s chief executive JT Wang has also said publicly that he doesn’t foresee any problems for his firm’s investment in Chongqing, and that Acer’s goal is for production in the city to account for 50% of its global total by the end of this year.

In contrast to Dalian, where Bo’s relationship with local billionaire Xu Ming is now under investigation (WiC145), rumours of similar skulduggery in Chongqing have yet to lead to arrests, and authorities will be hoping that none of the former investment comes up for similar review.

The city’s investment team will also be confident that, despite the current turbulence, the deeper economic currents are still running in their favour.

These include the central government’s Go West campaign to encourage development away from the coastal zones, as well as the shift inland from higher-wage cities in provinces like Guangdong and Zhejiang.

That makes the commercial logic look convincing enough, especially if you mix in Chongqing’s size (32 million people), its urbanisation plans (see WiC77) and its opportunity to capitalise on huge logistics investments like the ‘New Silk Road’ rail route to Western Europe (see WiC112).

In a single example of this cluster strategy gaining critical mass, Acer’s Wang told the China Daily this month that he was shifting more production to Chongqing because the number of component suppliers there had increased from 400 to over 700 in the last six months alone.

So, is there any evidence that Bo’s demise could hurt Chongqing?

The city hasn’t escaped the Bo scandal completely, with its plans for financial hub status apparently experiencing a setback.

Also in WiC77 we reported on efforts by US private equity firm TPG to establish a yuan-denominated fund in the city, with co-investment from two local partners.

As recently as February, TPG was reporting that it had raised Rmb4 billion for two new funds, one of which was to be located in Chongqing. But the South China Morning Post now suggests that two other global private equity firms have suspended plans to set up funds of their own, and that TPG executives are having second thoughts about committing the bulk of their own capital in the city.

“Chongqing tried very hard to make TPG a good example in the hope that the city could attract more foreign funds, but the case of Bo Xilai has suddenly changed the whole game,” an insider told the Hong Kong newspaper.

There is also talk that debt – rather than investment – will be Bo’s real legacy to the city, following reports from 21CN that Chongqing has run up at least Rmb500 billion ($79.3 billion) in borrowing.

Chongqing officials have since fired back, insisting that that their finances are in surplus when subsidies from the central government are factored in, and suggesting that other cities are in a more precarious fiscal position than their own.

Still, as Xujun Eberlein reports on her blog China Inside Out, many of Bo’s policies were costly commitments. The ‘red song’ campaign was expensive, she says, with mandatory singing financed by city authorities.

Famously, Bo also ordered local TV channels to stop showing commercials, and authorities made up half the revenue shortfall. (Eberlein notes too that the advertisements were back on air within hours of Bo’s dismissal.)

But pride of place probably goes to Bo’s gingko-planting plan, which he himself claimed to have cost an incredible Rmb10 billion (or about $1.5 billion) in 2010 alone.

Returning to tree planting as metaphor, there is also a catch with the gingko that Bo may not have understood: Eberlein warns that the female tree gives off a foul stench when it flowers.

So although Bo probably won’t be around to experience it himself, when the stink starts wafting through Chongqing’s streets, there will be little option but to axe the surviving gingkoes.

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