Bo Ouster May Calm China Passage to Slower Economic Growth

Photographer: Alexander F. Yuan/AP Photo

A couple observe the city skyline at a viewpoint in southwestern China's Chongqing city. Close

A couple observe the city skyline at a viewpoint in southwestern China's Chongqing city.

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Photographer: Alexander F. Yuan/AP Photo

A couple observe the city skyline at a viewpoint in southwestern China's Chongqing city.

Bo Xilai’s downfall and the arrest of his wife on suspicion of murdering a U.K. citizen may have a stabilizing influence on China’s economy by unifying the ruling Communist Party before a once-in-a-decade leadership transition.

The party on April 10 suspended Bo from the ruling Politburo, saying he was suspected of committing “serious discipline violations,” China’s official Xinhua News Agency reported. His wife, Gu Kailai, 53, and an aide were put in custody for suspicion of murdering British businessman Neil Heywood, Xinhua reported separately.

Bo’s removal may foster more stability in the world’s second-biggest economy ahead of the 18th Communist Party Congress, said Ronald Wan, a Hong Kong-based managing director at China Merchants Securities Co. The congress later this year will pick a new party head and Politburo. Bo, 62, threatened to upset China’s consensus-dependent leadership if he remained in the inner circle, said Jonathan Fenby, China director of the U.K. investment-research service Trusted Sources.

“It paves the way for the new leadership ahead with more stability,” Wan said in a phone interview in Hong Kong yesterday. China Merchants Securities oversees about $1.5 billion in assets.

Source: AP Photo/Kyodo News/China Foto Press

Former Chongqing Communist Party Secretary Bo Xilai, right, is accompanied by his wife Gu Kailai at his father's funeral in Beijing, China, on Jan. 17, 2007. Close

Former Chongqing Communist Party Secretary Bo Xilai, right, is accompanied by his wife... Read More

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Source: AP Photo/Kyodo News/China Foto Press

Former Chongqing Communist Party Secretary Bo Xilai, right, is accompanied by his wife Gu Kailai at his father's funeral in Beijing, China, on Jan. 17, 2007.

Shares Rise

Chinese share prices rose in the two days since Bo’s dismissal was announced, with the Shanghai Composite Index (SHCOMP) gaining 0.4 percent as of 11:29 a.m. after gaining 0.1 percent yesterday, and global investors considered China’s sovereign debt to be less risky in trading today.

Contracts insuring China’s sovereign debt for five years fell 2 basis points to 115.5 as of 11:36 a.m. in Beijing, according to Royal Bank of Scotland Group Plc prices.

That’s on course for its lowest since April 9, the day before Bo’s Politburo suspension was announced, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The contracts, which typically climb as investor confidence deteriorates and decrease as it improves, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

‘United Front’

“The expulsion of Bo Xilai from the communist party and politburo should be seen as a positive for the smooth transition of power in China,” said Michael Kerley, manager of Henderson Far East Income Ltd. at Henderson Global Investors in London. It has about 64.3 billion pounds ($102.4 billion) under management.

“Bo was a rising star in Chinese politics but was a maverick with policies that favored tradition rather than reform,” he said in an e-mail. “It is very likely that the Communist Party puts on a united front in the months ahead to ensure that the transition to a new leadership passes smoothly.”

Bo’s disgrace endangers his so-called Chongqing model of economic growth, which focused on state-led spending on infrastructure projects, often through local government finance vehicles. Nine such vehicles in Chongqing, covering everything from water works to highways to cultural attractions, reported total debt of more than 157 billion yuan ($24.9 billion) in bond prospectuses issued last year.

Local Debt

The rise of local government debt has been a focus of concern by China’s leaders, including Premier Wen Jiabao. They have pledged to curb it in order to keep the country’s debt burden under control and prevent the banking system from being swamped with bad loans.

The end of Bo’s career means that he won’t have a chance to imprint his debt-driven economic ideas on the elite Politburo Standing Committee, the nine-member group that exercises supreme power in China. Bo had been mentioned as a possible candidate for the next committee by analysts including Ding Xueliang, a social sciences professor at the Hong Kong University of Science and Technology.

Bo’s departure reinforces China’s consensus-driven leadership, which has pushed for slower growth, targeting a 7.5 percent rate this year. The policy focus is on more consumption and less spending of the kind that drove Chongqing’s economy, as well as on monetary policy by the People’s Bank of China that seeks to control inflation and control investment bubbles.

Party Line

The party worked quickly to foster a common line on Bo’s suspension among its 80 million members, ordering them to support the decision in a front-page commentary in the People’s Daily (PEODOZ), the party’s official organ. Party papers across the country, from Guangdong in the south to Shanxi in the north, reprinted the directive.

“The death of Neil Heywood is a serious criminal case involving the family and close staff of a Party and state leader,” the commentary said. “Bo has seriously violated the Party discipline, causing damage to the cause and the image of the Party and state.”

China’s central television station read the charges against Gu every hour on the hour yesterday, detailing how she had been arrested on suspicion of murdering Heywood in Chongqing.

U.K. Prime Minister David Cameron said his government wants to “get to the bottom” of the case.

‘Disturbing and Tragic’

“We did ask the Chinese to hold an investigation,” Cameron told a news conference in Jakarta yesterday. “We are pleased they are now doing that and I stand ready to cooperate in any way we can. It is very important we get to the bottom of what has happened in this very disturbing and tragic case.”

Both Heywood and Bo’s son, Guagua, attended the Harrow School in the U.K., the older Heywood in the 1980s and Guagua from 2001 through 2006, according to Luke Meadows, information officer for the Harrow Development Trust and Harrow Association.

The U.K. had been told by China that Heywood had died of alcohol poisoning, according to John Gallagher, spokesman for the British embassy in Beijing.

Bo won national recognition and praise for a crackdown on organized crime in Chongqing, where he served as the top official until last month, that also drew the ire of legal experts. Peking University Professor He Weifeng accused Bo of trampling on legal rights.

Red Songs

Bo also pushed state-led investment to narrow wealth gaps and fund infrastructure projects, and revived so-called red songs and sayings from the era of Chairman Mao Zedong. Unlike most fellow members of the Politburo, Bo didn’t shy away from reporters. He took questions on March 9 in Beijing a week before he was ousted from his Chongqing post, defending his record and his wife’s character.

That was after his former police chief, Wang Lijun, had spent the night of Feb. 6 at the U.S. Consulate in Chengdu, an event confirmed by both the U.S. and Chinese governments. On Feb. 8, Wang was booked with a first-class seat on an Air China (753) flight from Chengdu to Beijing accompanied by a vice minister for state security, Bloomberg News reported on Feb. 10.

Bo’s suspension from the Politburo “was a positive development,” said Li Cheng, a scholar at Washington’s Brookings Institution who focuses on Chinese elite politics. “You eliminated a notorious individualist, a Maoist, and that contributed to China’s long-term development because Bo held rule of law in contempt.”

A commentary in today’s People’s Daily reaffirmed the country’s commitment to “preserve the good situation of stable reform and opening.”

The danger for the party is that people see Bo’s ouster and the charges against Gu as politically motivated, reflecting a schism in the leadership as factions in the Communist Party jostle for power.

“They’ve struggled with how to portray this,” said Christopher K. Johnson, a senior adviser at the Washington-based Center for Strategic and International Studies and a former China analyst at the Central Intelligence Agency. “Their greatest fear is to show any inkling that the leadership is anything but totally unified.”

Fenby, author of the forthcoming book on contemporary China called “Tiger Head, Snake Tails: China Today,” said Bo’s fall unified factions within the party’s leadership because collectively they all realized Bo posed a danger to them.

“The rogue player, Bo, has been eliminated,” Fenby wrote in a note on the Trusted Sources website. “Consensus rules, at least for the time being.”

To contact Bloomberg News staff for this story: Michael Forsythe in Beijing at mforsythe@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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