March 1, 2016 / 11:31 PM / in 2 years

Chongqing blazes economic trail as Bo scandal recedes

CHONGQING, China (Reuters) - The economic success of the metropolitan area of Chongqing in central China was in the balance following the jailing four years ago of its charismatic Communist Party chief Bo Xilai, a rising star in the political elite.

A construction site is pictured in Chongqing, China, January 24, 2016. Picture taken January 24, 2016. REUTERS/Sue-Ling Wong

    But the city has continued to thrive, a feat that has some lessons for other local governments and reflects a pragmatic streak in China’s leadership in allowing Bo’s Chongqing model, and his economic adviser, Mayor Huang Qifan, to survive his fall.

    China is trying to transform its giant economy from one led by basic manufacturing to one more reliant on services and consumption, which the government expects to provide more stable growth in the future. A slowdown in growth and slumping stock markets in the past year have raised concerns among investors about Beijing’s ability to maintain stability while driving structural reforms.

Chongqing appears to have achieved that balance.

Unlike much of China, it didn’t shirk the hard decisions, opting early to cut overcapacity in its steel industry and investing heavily to move up the value-chain from lower-end manufacturing to electronics, biomedical products and high-tech equipment.

Under Bo, Chongqing became one of China’s fastest-growing regions, helped by a crackdown on corruption, corporate tax breaks, the pursuit of foreign investment, and rapid urbanization and industrialization.

And so it remains, chalking up growth of 11 percent in 2015, while the national economy slowed to a 25-year low of 6.9 percent.

While Beijing purged many of Bo’s associates, Huang was left in office to oversee that success under new city party boss, Sun Zhengcai, a man tipped for top national leadership.

Even so, the scandal briefly threatened Chongqing’s economic future.

Local government official Le Peng said business activity and foreign investment declined, and projects initially approved for Chongqing were moved elsewhere.

“The Bo Xilai incident had a very large impact on Chongqing’s economy,” he said, speaking from an office in the city’s Liangjiang New Area.

Chongqing was blessed with advantages before Bo and Huang, from its handy location on the Yangtze River and arms-manufacturing history in the 1940s, to central government’s decision to make it the fourth municipality in 1997, alongside Beijing, Shanghai and Tianjin, in a push to develop inland regions.

But it didn’t rest on its laurels.

“I think we can learn from Chongqing’s experience about the importance of undertaking industrial upgrading and restructuring,” said Yating Xu, an economist at IHS in Beijing.

CHINA MOTOWN

Policies included a corporate income tax at 15 percent to develop priority industries in China’s west compared with 25 percent in more developed parts of China; the first tax-bonded area in inland China, so importers didn’t pay duties until they sold products on; incentives for investing in high-tech and green industries; reforms to encourage rural workers into the city; and policies to make more land cheaply available to industry.

The city is now one of the country’s leading centers of automobile manufacturing, drawing global brands such as Hyundai, Iveco, General Motors and Ford.

One of China’s biggest carmakers, Chongqing Changan Automobile, which plans to sell 4.5 million vehicles by 2020, is based there.

Huachen Xinyuan’s new auto plant, which primarily supplies China’s domestic market, is based in nearby Fuling district - once a six-hour boat ride from Chongqing center but now just 40 minutes by high-speed train.

That in turn attracted businesses like Haoxiang Machinery.

“We moved out here to be closer to Huachen Xinyuan, along with 14 other component suppliers,” said Ye Huagang, its boss, over the buzz of jackhammers at his new factory. Global electronics brands including Hewlett-Packard, Foxconn, Acer and Asus all have operations in Chongqing, lured by tax breaks, cheap labor and land, plus a developed supply chain and logistics. The region makes one in three of the world’s laptops.

The vigor of the manufacturing sector has also helped develop related technology clusters and attendant finance and logistics services.

“There’s a very close connection between the development of manufacturing and services,” said Tu Xingyong, chief economist at Chongqing’s Economic and IT Commission. Chongqing hasn’t just been successful at attracting inward investment. Chongqing firms are also outbound investors, and consular representatives from 10 countries are based there.

“We are here mainly to attract Chinese companies who want to invest in Ethiopia and Africa,” said Kebede Abera, Ethiopia’s consular general to Chongqing.

In the past four years, around 80 Chinese companies have visited Ethiopia, and some, including Chongqing carmaker Lifan and Chongqing Bureau of Geology and Mining Exploration, have invested there.

POLITICAL PROMISE

Fears that Chongqing might suffer for its connection with Bo, who some had considered a potential rival for leadership in Beijing, were soothed when President Xi Jinping made his first trip of 2016 to the city.

“This place is full of promise,” he said in a speech looking out over a port connecting railways, waterways and roads along China’s new Silk Road linking Asia and Europe.

That is in part a political calculation.

“If Chongqing’s economy slowed down, the outside world would think Chongqing can’t do without Bo,” a source with ties to the leadership said.

As a further sign of favor, Mayor Huang was among half a dozen regional officials picked to join Xi on his visit to the United States last year.

Huang’s next role could well take him to the national stage.

Two sources say he is tipped to become secretary-general of the cabinet, which would make him Premier Li Keqiang’s right-hand man.

“The power he has here, even if it is local, it’s a very national level experiment,” said Sergio Maffettone, Italy’s consul-general to Chongqing. “Chongqing is like a lab for reforms.”

($1 = 6.5339 Chinese yuan renminbi)

Additional reporting by the Shanghai Newsroom, Kevin Yao, Benjamin Kang Lim and Pete Sweeney; Editing by Will Waterman

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