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Two Washingtons, Three Views of Bo Xilai Fallout

We asked three leading China experts for their insights about the Bo Xilai case and its impact on business, looking broadly and at potential projects between Seattle and Chongqing. We also asked them to weigh in on how the drama could shake up the government in Chongqing and affect China’s upcoming leadership transition.

David McHardy Reid is Professor of Global Business Strategy at Seattle University’s Albers School of Business and Economics and Co-Director of the Albers Center for Global Business.

David Bachman is Professor at the Henry M. Jackson School of International Studies, University of Washington.

Cheng Li is director of research and a senior fellow at the John L. Thornton China Center in the Foreign Policy Program at the Brookings Institution in Washington D.C.

Q: What is the impact on business?

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David Reid

Reid:  The impact may be positive and negative, but more the latter.  The likelihood of the former is opaque and more difficult to support as those effects play out in the longer term.  When Bo’s replacement as Chongqing party secretary, Zhang Dejiang, admits that the Bo case has ‘greatly tarnished the image of the party and the nation and has had a grave impact on Chongqing’s reform and development,’ the situation must be perceived as overwhelmingly negative, at least in the near term.

I know of cases where potential investors had performed due diligence on a range of locations then settled their choice on Chongqing.  They had even dined with Bo Xilai and were charmed by him.  Yet, when the ‘Bo issue’ broke, their assessment was that they understood less about China than they had previously thought. They felt insecure with Chongqing and subsequently switched their investment location to ‘safe Shanghai.’

—David Reid

The termination of some of the heavy-handed actions of the Bo regime that confiscated and curtailed private businesses, such as those under the aegis of the ‘Smash Black campaign’ may turn out to be positive.  But to fully appreciate the impact we will have to see what the line up of the Standing Committee of the Politburo looks like when it is revealed in the fall.  We will need to assess the forthcoming cascading changes in government and policy at the Chongqing level. Given viable, transparent, well-managed policy and projects, the business and investment future may, in the longer term, be more secure.

David Bachman

Bachman:  What does Chongqing have to offer to foreign investors? That’s for Chongqing to sell. I don’t know why you would choose Chongqing over another city. Labor costs are lower but transportation costs are higher. The Chinese government is getting into deep economic trouble. Growth is slowing; today papers are talking about a growing surplus sitting in warehouses or on piers where borrowing now doesn’t make a lot of sense. There isn’t a lot of observed need for many new investments in China.  That’s going to raise the question of how do they sustain growth everywhere, not just Chongqing. They don’t have a great answer to that. It’s extraordinarily difficult.

Li:  It depends on the nature of the cooperation. If originally based on political consideration, these projects will be reevaluated. If it’s really important for the future of Chongqing, it may continue.

Cheng Li

In general some of the projects will receive less financial support. Some that have not started will never start. Some of the projects will be significantly reduced in scope.

I think that it will be a blow to Chongqing projects. It has not  happened yet. There will be a major reallocation of resources from the central government perspective.

—Cheng Li

Q: What is the potential fallout on projects planned between Seattle and Chongqing?

Reid:  It is very likely that delays and changes will occur to projects that have been started between Seattle and Chongqing.  On the Seattle side we should not proceed as usual. Seattle entities should bolster, perhaps double, their efforts to understand and show support for Chongqing as an investment destination.  Hard work to ensure that this period of uncertainty is bridged may well pay off.  In this way a prospering relationship between the cities and their respective business communities may be securely established.

Bachman:  I think Bo’s demise doesn’t have much effect on those projects. It think the more general challenges facing China are going to pose the challenge there. There’s going to be some fallout. Much of the dynamism in some of these events is going to get dissipated because of the immediate problem of how to get the economy going again. If some do lead to further investment, they are likely to draw the energy of Chongqing officials. They like counterparts in Beijing are grasping at straws. If it’s not going to have rapid payoff, I think there’s going to be a slowdown in those projects. Of course delegations with business potential in the long term will still be welcome, but I don’t think they’re going to get the priority they did before. There’s less attention to devote to them. Some momentum could be lost. Both sides worked hard over the last couple of years and that’s seen as useful by both sides. They’re certainly going to try to maintain momentum. But it becomes a question of how much money they have to put into that.

Li:  For some projects, [including Microsoft's Cloud computing], I think it’s in a very dangerous situation; it is in the wrong location. Inland, it’s very difficult to receive human resources. Bo, because of his political capital, made Chongqing an engine of economic growth. Now the importance of Chongqing is significantly reduced. You need to look at Central China — Lanzhou — it’s the central government strategy. Also Shanghai will come back.

Q: How will this case affect China’s leadership transition?

Reid:  The road to the top in the CCP and government is a long road and requires talent, dedication as well as abundant political aptitude.  The current political drama demonstrates that, as in any organization, you have factions competing and pulling in different directions to advance their causes.

Bo Xilai represented a certain way of doing things. He was dictatorial and courted popularity in places that made the top powers uncomfortable.  He sought to make Chongqing a place where a new set of political and social experiments for China flourished. Bo managed the perception of waging war against organized crime and he mobilized the population for mass politics.  He attracted those dissatisfied with Beijing’s efforts to reassert central authority over provinces and Party officials.  His problems started when he became too popular in the wrong places—among the public and inside major sectors of the Party and the military. Something to be considered is that even today there may be 20 million people in the municipality that would welcome him back.  That is the realpolitik that has to be factored by those in charge.

The political context of any organization is very real. The development and uses of power, authority, influence, and politics are natural adjuncts to the processes needed to formu­late, shape, and implement strategies. The Chinese government is not immune from these forces.  Neither are the CCP upper echelons immune. It is possible the Gu Kailai scandal may have been manipulated and seized on as a pretext to investigate and dethrone Bo Xilai.  What is especially interesting, at this time, is that some of the top-level internal conflicts have become less opaque.

Bachman:  Well, it takes Bo Xilai out of the picture. To the extent that there’s some popular support expressed for Bo it raises the stakes in ways we haven’t seen for a long time. Since we’re having nearly a total turnover at the top, there’s already going to be a fair amount of uncertainty over who would occupy what position. You add to that an economic slowdown, growing tension over the South China Sea, and uncertainty about the case, and it is sort of heightening tensions in ways we haven’t seen in a long time.

In a political transition, not to say arrangements have been overturned, but where the new guys are going to be stuck with challenges they didn’t expect in a deteriorating overall situation for China, and in the context of an American presidential election in which Republicans are talking about a much harder line with China, I think it’s a more fraught transition than in 2002 or even 1992. All of these speak to much more pressure in the system that will challenge Xi Jinping and others almost from the get go in ways that haven’t been seen before.

Li:

Chongqing will have a leadership change in the months to come. Zhang Dejiang will be replaced. Somebody from other provinces will be appointed. That will happen in a matter of weeks. It’s highly likely [current mayor] Huang Qifan also will be replaced in the near future.

—Cheng Li

For Huang Qifan it depends on whether he can get reelected to the central committee.  If not he will leave.

In [the Chongqing municipal government], many are vulnerable. You do see the deliberate effort to only target a small number of people, not too many. That’s to maintain stability. But after awhile, usually some people too close to Bo will be replaced.

Q: Is the “Chongqing model” dead?

Reid:  A heavy blow yes, near mortal perhaps, but it is too early to say that it is fatal.  The immense costs and the style of the so-called ‘Chongqing Model’ have spurred a Party investigation of Bo’s conduct and the cost of the experiment.  Some credible estimates put the debt level racked up by Bo Xilai at a trillion yuan.  Bo’s critics often cite the cost of the Green Chongqing project, which is put at US$7.6 billion and with annual maintenance costs of US$1.5 billion.  However, considering the volume of concrete poured in Chongqing there can be little doubt that a green initiative was a good thing.  The trees are a welcome relief and are appreciated by the citizenry.

There are suggestions, however, that capricious choices were made:  seemingly many of the trees that were planted were a favorite of Bo and are exceedingly expensive. When you blow a few billion extra dollars here and there the costs mount and attract suspicions of malfeasance. Whether the suspicions are grounded will be determined by the Party’s disciplinary investigation.

Bachman:  Some things Bo was pursuing, the reform of the hukou [household registration] system of people living in Chongqing Municipality, for instance, was a major reform and one I hope they continue with. The crackdown on crime — on people who had gotten rich on development deals — it’s one crony group over another. I didn’t find that terribly persuasive. Bo was able to put a lot of money into Chongqing, but he did that in a way that was not ultimately sustainable: lots of borrowing, lots of debt.

He did it in the same unsustainable way that China has with so many other [developments] — lots of investment, lots of borrowing, but it’s not clear that any of this stuff is going to pay off or pay itself back. Bo drew support from people concerned about economic inequality, and his model was more statist than laissez-faire.

If Bo had been there longer and people had minded him more, the gloss would have still come off the Chongqing experience. You were reaching limits in what you could say for Chongqing. It really was not widely replicable.

—David Bachman

Li:  The Chongqing model itself — basically it’s over. Its huge debt and major infrastructure development,  rapid urbanization, you name it, these are all largely because of Bo Xilai’s personal ties and his short term development plan. In the long term not beneficial for the region or for the country.

Published August 30th, 2012

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