China's Ides of March

The sacking of a high-profile Chinese politician could have significant implications for Australia.

PORTFOLIO POINT: The sacking of high-profile politician Bo Xilai may be the first major salvo in the struggle for the Communist Party's direction – and the ramifications for Australia could be significant.

On the 15th of March, 44 BC, Roman politician Julius Caesar arrived at the Senate. But as every schoolboy knows, he did not leave it.

On the 15th of March, 2012, Chinese politician Bo Xilai also saw his career come to an abrupt end. And while Bo's assassination was metaphorical, coming by way of a terse press release from the party mouthpiece, Xinhua, rather than the 23 stab wounds of Caesar, the two events have more in common than just an inauspicious day of the month.

Like Caesar, Bo’s career has been marked by an ambition that made him as unpopular with his fellow statesmen as he was popular with the people. Also like Caesar, handsome and charismatic, Bo’s ease in the public eye was further assisted by his pedigree. Whereas Caesar's father, Gaius Julius Caesar, was a senator, praetor and proconsul, Bo's father, Bo Yibo, was one of the eight so-called "great eminent officials" who, around Deng Xiaoping, held sway over China during the 1980s and 1990s as the country transformed into the hybrid economy of the present era.

Bo Xilai, a “princeling”, was thus seen as a natural contender for China’s nine-man Standing Committee of the Politburo, which forms at October's 18th National Congress. Having achieved great success as governor of Liaoning province and then as Minister of Commerce during Wen Jiabao's government of 2003-2007, Bo has been described variously as a “rock star” and China's John F Kennedy, known for a distinctive, media-friendly personal style against the dull norms of Beijing’s apparatchiks.

Yet there was a dark side to Bo’s rise. In Liaoning, he was accused of torturing Falun Gong practitioners and overseeing systematic organ harvesting at a Shenyang hospital. It's an underreported fact that in 2007, the Supreme Court of New South Wales issued a default judgment against Bo for torturing Falun Gong practitioner Pan Yu. Yet, protected by diplomatic immunity, not to mention a complete indifference to such things, a few weeks later he was elevated to party chief of Chongqing, the enormous south-western metropolis and one of China's four municipalities directly controlled by the People's Republic.

Here, Bo's rise only became more stellar, with a dramatic crackdown on the city's massive criminal underworld followed by a Maoist-style campaign to reinvigorate "red culture" (this is despite his father being purged during the Cultural Revolution and imprisoned for 15 years). Then there was the launch of what has been variously described as the "Chongqing model" of economic growth, where a focus on wealth distribution, social housing and law and order not only made Bo more popular, but led to local-area growth of 14.3% in 2008 – 530 basis points above the national level.

In contrast to the “Beijing model”, where measures of inequality like the Gini coefficient are no longer published, or the “Guangdong model”, an economically-liberal system based on low-wage labour and manufactured exports, (interestingly, Wang Yang, that system's greatest proponent, was Bo's predecessor in Chongqing), the Chongqing model sought to reconcile China’s reality with its socialist pretentions and bring the benefits of blistering GDP growth to more people that what China’s New Left describe as “capitalist roaders”. Naturally, it was a vote winner, or at least would have been if Chinese people were allowed to vote.

The political assassination of Bo Xilai can thus be seen as being more than just the silencing of an uppity populist, but the first major salvo of what is emerging as a struggle for China’s direction at October’s Congress. And not only is this contest far more interesting than Gillard versus Rudd, or indeed Gillard versus Abbott, the results will be more germane for Australia’s economic future, which is why you’re reading about it in Eureka Report, not just Foreign Policy or The Diplomat.

Ostensibly, Bo was sacked due to "mismanaging" what is now referred to as the Wang Lijun incident. Wang (no relation to Wang Yang), Bo's deputy in the trials of Chongqing's gangland, was unexpectedly put on sick leave in February, but was instead spotted by citizen micro-bloggers – using China's record-breaking equivalents of Twitter – emerging to awaiting police from the US Consulate in Chengdu, five hours away from Chongqing by car (he allegedly sped there in hot pursuit from the security services). The next day, Chinese-language papers in Taiwan and Hong Kong reported that Wang had sought asylum and had accused Bo of being "the greatest gangster in China." And while both the US and Chinese governments refused to confirm the mounting rumours of Wang's attempted defection or Bo's alleged corruption, neither did Beijing come to Bo's aid.

Like Caesar, avoided by his fellow senators in the days leading up to the Ides of March, Bo the rising star was abandoned by China's leadership. Adding to the Wang Lijun scandal, he was furthermore subjected to negative editorials in the official press – almost unprecedented for such a high-ranking sitting official – and then an even rarer public rebuke by Wen Jiabao. Referring obliquely to Bo's attempts at reviving Maoist red culture in Chongqing, Wen warned darkly of the dangers of a second Cultural Revolution.

A different analogy may be found, however, in China's more recent past, in the Qing dynasty, which came to an end almost exactly 100 years ago. American historian Stephen Platt, a scholar of the period, whose recent book, Autumn in the Heavenly Kingdom, received rave reviews in the Wall Street Journal, among others, cites "enormous, inchoate rural unrest" as being the present leadership's greatest challenge. The Taiping Rebellion of the 1850s, which exploded from a local disturbance to a major revolution that killed 20 million and set the scene for the events of the bloody 20th century, was, Platts says, most remarkable for its swiftness and spontaneity.

While Chongqing is unlikely to emerge as analogous to the southern breakaway kingdom of Taiping, nor Bo Xilai to the charismatic but insane Hong Xiuquan, who claimed to be the brother of Jesus Christ, the Communist Party is desperate to make sure its present internecine conflict does not spill over the walls of the Zhongnanhai – the heavily fortified headquarters of China’s leadership – and into the wider public.

Trapped in a geographic wedge between an unhappy Tibet and Xinjiang to the south and west, a sea controlled by the US Seventh Fleet to the east, and by Russia and increasingly-Westernised Mongolia to the North, China’s concerns are – now as in the past – primarily with keeping its progressively fractious population placid, rather than on launching social reforms or embarking on new geopolitical adventures that it’s mischaracterised to be doing in Australia’s popular media.

China’s population, despite attempts at re-engineering it through the one child policy, is still too large to support full rural employment through normal means without causing massive inflation through fixed-asset investment projects, or massive internal migration into increasingly low-margin export industries or non-productive service industries. And with credit drying up for new infrastructure projects and demand falling for cheap exports, the Beijing Model is exhibiting signs of running aground.

Bo Xilai, who offered an alternative vision in Chongqing, has quickly been denounced as a Maoist reactionary against political or economic reform. He may have found sympathy among China’s millions of 'New Left’ micro-bloggers and internet activists, just as he was hated by many of China’s nouveau riche (though his Harrow and Oxford-educated son was said to enjoy driving a red Ferrari), but either way he is now persona non grata; just one of many fallen leaders in China’s long passage of dynastic feuds.

What is clear though is that China has reached another turning point in its political history that will, in a matter of time, come to effect a turning point in its economic history, despite the as-yet unclear outcomes they may portend.

This turning point, as I see it, is the end of the age of China’s rise that began in a social compact following the events of Tiananmen Square (Bo Yibo was himself instrumental in the crackdown) to buy political compliance with economic growth; most of it state-directed through top-down projects, albeit with the veneer of modern capitalism, giving the impression that China had departed from a Soviet worldview, as had Russia.

This age of China’s rise, which through the redirection of Chinese savings into American Treasury bonds globally and fixed assets locally resulted in the twin peaks of American equities and house prices circa 2007 and Chinese equities and house prices circa 2010-11, has already come to a premature end on the American side of the ledger (historian Niall Ferguson calls this symbiotic relationship "Chimerica"), but now it’s catching up on China, with not just the sacking of Bo Xilai, but a whole host of troubling indicators bearing witness. As Alan wrote in his weekend briefing on Saturday and I wrote last Monday (see Looking beyond China), 7.5% GDP growth is now considered by many as a best-case scenario for China, not a worst-case: the hard-landing may have begun.

The post-Cold War period of political and economic history between 1989 and 2012 – with its booms and busts in Asia, America and Europe, its refactoring of trade and investment flows, its currency manipulations and inefficiencies, its explosion of financial industry assets – may be remembered thus as a story primarily of a hold-out Communist government that didn’t want to let go the way that Gorbachev’s Russia did, and built a beast that ended up devouring itself anyway. The year 1989 was the year of the Earth Snake. This year is the year of the Water Dragon. Both reptilian zodiacs have bookended an extraordinary age, especially for Australia, but the apocryphal Chinese proverb, “may you live in interesting times”, was intended as a curse, not a blessing.

I have to date been fairly confident of a hard landing in Chinese GDP growth, but have hitherto viewed that hard landing as more spelling bad news for Australia, than for China, which could indeed benefit from an economic rebalancing from exports and investment towards consumption and social welfare. With Beijing’s latest power plays at hand, however, I’m now less sure. Vested interests, being as they are, can always be relied upon to be more concerned with maintaining an unsustainable status quo than in ushering reform, but by both delaying the inevitable and fanning the flames of popular discord, China’s government only invites further risk of the events we saw spreading throughout the Middle East this time last year.

I place those risks at less than 10% in the short-term, a figure I’ve admittedly only plucked from the thin air of gut feeling, but I’m watching events closely with the view to potentially withdrawing my calls to invest in businesses that would benefit from growth in the Chinese consumer sector. While in the long-term things like lithium-ion batteries (see Under the Radar: Grey gold from Friday), car tyres (see Ten-gallon stock tips), and gourmet salmon (see Under the Radar: Peak fish) will do well in China, the prospects of mass unrest wouldn’t augur well in the medium term.

On March 15, as events took their course in Beijing, Fortescue Metals doubled its bond offering to $US2 billion so it wouldn't have to tap bond markets again. While I've always questioned the logic of expanding iron ore production against mounting evidence of a Chinese fixed-asset overhang, I can't but admire the timing of Andrew Forrest bringing in the funding before funding for this type of thing may well run out.

Like Caesar's wife Calpurnia, who dreamt her husband's death, he may have had a vision.