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Bo Ouster Undermines Model to Bridge China’s Wealth Gap

Sitting on a stool polishing shoes for 2 yuan (32 cents) a pair in front of her apartment block in Chongqing, central China, Wang Yunqing says she has reason to thank Bo Xilai, the disgraced former leader of the city.

“Life definitely improved” under Bo, said the 41-year-old mother and former farmer. She lives in one of Bo’s public housing projects and has a benefits plan from her second job cleaning the city’s light-rail trains. “Now I have my own nest and don’t need to worry about having to move out when the landlord gets unhappy.”

Wang is a beneficiary of an economic model championed by Bo in a municipality whose population of 29 million is larger than that of any U.S. state except California. Bo sought to balance the fastest municipal growth rate in the country with measures to stop millions of rural migrants being left behind by China’s industrial boom.

Combining multibillion-dollar government projects with a welcome mat for foreign investors and public morale programs, the so-called Chongqing model may be overshadowed by the downfall of Bo, whose wife is under investigation for murder.

“Because Bo Xilai is in political trouble people are starting to demonize the Chongqing model,” said Bo Zhiyue, senior research fellow at the National University of Singapore’s East Asia Institute, who is no relation. “They are ignoring the genius of this. Bo’s fall is a major loss for the city and also in a sense for the nation because the model has implications for how to manage the nation as a whole.”

Reining In

With the architect of the plan ousted from his Chongqing Communist Party chief and Politburo positions, the city’s new leaders are reining in projects financed by as much as 1 trillion yuan ($159 billion) in borrowing.

Bo, 62, championed the creation of low-rent public housing, attacked crime, planted hundreds of thousands of trees and revived songs and slogans from Mao Zedong’s era to try to make ordinary people feel part of the nation’s economic success.

China’s 10.2 percent average annual economic growth for the past three decades drew millions of migrants from farms to industrial cities, causing the income gap between rich and poor as measured by the Gini coefficient to exceed the danger level for civil unrest, according to Bo.

His economic measures gave Chongqing a different feel from other Chinese cities, said Zhang Tingting, managing director of London-based information provider Yangtze Business Services Ltd., who has been doing work in the city since 2005. “People in the street feel good, they are happy, they say good things about their leaders,” she said.

‘Important Lessons’

“At a time when the wealth gap is increasing and the population at large is resenting that, Bo was able to win popular support,” said Zhang. “What he has done in Chongqing has provided important lessons to the central government in terms of managing the country, and how you win popular support at a time of rising discord.”

Buying that approval was expensive, both financially and politically. As in most of China’s high-growth cities, Bo funded spending on construction and public works largely through debt. Chongqing’s local government finance vehicles owe more than 157 billion yuan, backed by land, according to data compiled by Bloomberg. Including other state-owned debt, total borrowing may exceed 1 trillion yuan, said Victor Shih, author of the book “Factions and Finance in China: Elite Conflict and Inflation.”

“Bo’s political connections accelerated the pace of growth in Chongqing but the amount of debt that will have to be repaid in the future also built up,” said Shih, a professor at Northwestern University in Evanston, Illinois, in a phone interview. “The future leadership will have to think of ways of dealing with this substantial amount of debt that is owed to the banks.”

Rapid Growth

Gross domestic product in Chongqing, China’s most populous municipality, rose 16.4 percent last year and 17.1 percent in 2010. The city government predicted another 15 percent expansion this year.

Bo’s autocratic style brought allegations of corruption and abuse of power, especially in the police crackdown on organized crime. His downfall began with news that his former police chief, Wang Lijun, had spent a night in the U.S. consulate in Chengdu on Feb. 6. Bo’s wife, Gu Kailai, was arrested last week on suspicion of murdering British businessman Neil Heywood.

Raised Concerns

“By all accounts, he ran the city as a personal fiefdom -- people were arrested often on no more than the say-so of an official,” Pauline Loong, a political analyst at CIMB Securities (HK) Ltd., wrote in a note to clients this month. “The police tactics he sanctioned raised concerns in a party that does not normally wring its hands over the lack of due process but which is increasingly concerned about public approval and acceptance.”

Chinese Premier Wen Jiabao said the government could lose its grip on power unless it imposes stronger measures to fight corruption, according to an article he wrote in the party magazine Qiushi, or Seeking Truth, after Bo’s ouster.

“There have been concerns that he was promoting a Cultural Revolution-style approach to our social tensions,” Li Daokui, a former adviser to China’s central bank, said in a Bloomberg Television interview April 18. Instead of “mass mobilization,” national policy focus ought to center on deeper deregulation of markets, Li said.

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.

Investigation Ordered

Bo’s replacement in Chongqing, Zhang Dejiang, and mayor Huang Qifan ordered an investigation of infrastructure projects initiated by the city government, China Business Journal reported.

The pullback may affect many of the hundreds of companies that flocked to the city in the past decade to take advantage of lower wages and record expansion. Ford Motor Co. (F), Coca-Cola Co. (KO), chemical makers BASF SE (BASFY) and BP Plc (BP/) and Taiwan computer maker Acer Inc. (2353) all have plants in the city.

Chongqing Rural Commercial Bank Co. (3618) shares fell 14 percent in two days after the China Business Journal reported on April 14 that the local government had begun investigating some city construction projects.

The loss of Bo Xilai, a former commerce minister and a so- called princeling who was the son of a Communist Party revolutionary, will probably slow Chongqing’s growth, said East Asia Institute’s Bo.

Bo’s Successor

“He was able to do more with Chongqing than someone who is not a princeling,” said Shih. “He was able to garner more resources, attract more investment.”

The appointment of Zhang, a vice premier for industrial and energy policy, probably will be an interim one, Shih said.

Officials at multinational companies in Chongqing said the political change in the city hasn’t affected investment plans.

“We continue to look at other opportunities there, given the size of the city and the focus on growth in the internal markets in China,” said Frits Van Paasschen, chief executive officer of Starwood Hotels & Resorts Worldwide Inc. (HOT), which has three hotels in Chongqing. “We take a long-term view on the growth and the opportunity in China.”

Ford’s China unit announced on April 5 it will spend about $600 million to raise capacity almost 60 percent by 2014 at its local passenger-car factory with partner Changan Automobile Group Co. with construction to begin immediately.

“Being in Chongqing has helped ship vehicles more easily to the increasingly important northern and western cities,” said Ford’s Shanghai-based spokesman, Trevor Hale.

New Apartments

Hewlett-Packard Co. Chief Executive Officer Meg Whitman met new party chief Zhang this week, according to the Chongqing Daily and Xinhua. Whitman said the city is a main focus of the company’s business in China, according to a report in the Communist Party-run local newspaper on April 18.

Hong Kong-listed Shui On Land Ltd. (272) launched its Chongqing Tiandi cluster project in Shanghai this week, the company’s biggest by floor area.

“We will continue to accelerate our construction in Chongqing,” said CEO Freddy Lee in a phone interview. “A lot of people around the region would love to move there. That’s why the economy has outperformed other cities.”

Chongqing spent 141.8 billion yuan last year to improve people’s livelihoods, or 55 percent of government expenditure, according to the local government.

Social Equity

A plan to build 800,000 apartments over three years would rely on debt to finance 70 percent of the 100 billion yuan cost, while construction would be handled by state-owned developers led by Chongqing City Construction, according to data compiled by Standard Chartered last year.

“Chongqing’s experience, perhaps, shows more than anything else the possibilities of using the market not for private gain but for public benefit,” Philip Huang, Professor Emeritus at the Center for Chinese Studies at the University of California in Los Angeles, wrote in a paper last November. “It places social equity front and center.”

So-called mass incidents in China -- strikes, riots and other disturbances -- doubled from 2006 to 2010 as China’s wealth gap rose, according to Sun Liping, a professor at Beijing’s Tsinghua University.

Some of the city’s older inhabitants liked Bo’s tendency to quote Mao’s texts.

Political Change

“I listened to speeches of all the Chongqing party secretaries and he was the best,” said Mu Gerong, 78, raising his hand to forestall interruptions from others sitting with him on a downtown street bench. “He could cite Mao Zedong’s works one paragraph after another.”

Premier Wen said in a press conference last month that without political change China risked a return to the 1966-1976 Cultural Revolution. During that time, Red Guards persecuted millions while chanting Mao slogans.

Even the city’s younger citizens pointed to Bo’s social achievements.

“We’re not interested in politics but Bo really did some good things here and it’s much safer now,” said Wang Ping, 25, waiting for her friends before going into No. 88, one of the city’s most popular bars. “The traffic patrol police are deep in people’s hearts now and we won’t accept it if they suddenly disappear.”

--Kevin Hamlin and Dingmin Zhang. With assistance from Yidi Zhao and Tian Ying in Beijing and Bonnie Cao, Michael Wei, Alex Kim, Parker Leung and Susan Li in Shanghai. Editors: Adam Majendie, Anne Swardson

To contact Bloomberg News staff on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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Buildings are lit at night in Chongqing, China. Close

Buildings are lit at night in Chongqing, China.

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A worker walks past a shopping and retail pedestrian street in Chongqing.

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A social housing project stands in Chongqing.

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A delivery truck loaded with electronics and appliances drives through a social housing project in Chongqing. Close

A delivery truck loaded with electronics and appliances drives through a social housing project in Chongqing.

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Bo Xilai, then Chinese Communist Party secretary of Chongqing, attends the closing ceremony of China's National People's Congress (NPC) at the Great Hall of the People in Beijing, China. Close

Bo Xilai, then Chinese Communist Party secretary of Chongqing, attends the closing ceremony of China's National... Read More

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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 Gu Kailai at his father's... Read More

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A shopper browses cosmetics for sale in Chongqing.

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