Can we trust China? Fallout from the murder of a Briton

The death of Neil Heywood and the purge of Bo Xilai have frayed the nerves of Western investors in China. Will the fear abate, or is this just the beginning? Ben Chu examines the case

The body of a foreign businessman is found in an anonymous hotel room in a busy city of a distant land. Officials say that the cause of death was a heart attack. The body is swiftly cremated, without an autopsy.

Then allegations explode out of nowhere that the man was murdered on the orders of the wife of one of the country's rising political stars. The scandal is subsequently used as a political bludgeon to bring down that particular ambitious politician, as a simmering factional battle at the highest levels of the regime bursts into the open.

The Neil Heywood/Bo Xilai affair is hardly a good advert for a country hoping to encourage more foreign investment. Business people generally do not relish working in countries where outsiders can be caught in the crossfire of domestic factional battles.

But this is China, the world's fastest-growing economy, the emerging superpower of the 21st century, the success story that every investor and corporation on the planet dare not miss out on.

Not even allegations of the murder of a Westerner – of the sort that would have expats scurrying for the airport if they emerged in some other places – can put off foreign investors. Just last week Ford announced plans to spend $760m (£472m) building a new factory in Hangzhou. Everyone still wants to climb aboard the China juggernaut as it motors its way into a glorious future.

Or do they? Henry Tillman runs Grisons Peak, a London-based merchant banking firm, which specialises in analysing investment flows into and out of China. He expects the political uncertainty generated by the purge of Mr Heywood's former patron, Bo Xilai, from his position as party secretary of the megacity of Chongqing on 15 March, will indeed undermine investment flows, at least in the short term.

"I anticipate instability for the next few months, both inbound and outbound. There will be increasing investor discomfort. It will take months before all this comes out," he said, referring to the ruthless manner in which the reformist camp in Beijing has extinguished Mr Bo's career.

Mr Tillman also argues that the political instability resulting from the purge of Mr Bo, who was widely tipped for promotion on to the Politburo's ruling standing committee this autumn, has already contributed to a slowing of investment flows. Beijing's commerce ministry reported last week that foreign direct investment in China in March fell on the levels of a year ago to $11.8bn. This is the fifth straight month investment by foreign firms has fallen year-on-year. And Grisons Peak's research shows that the aggregate value of mergers and acquisitions deals involving Chinese companies fell 28 per cent in the first quarter of 2012, down from $25bn to $17.3bn, as Chinese companies pulled in their horns abroad too.

"You've already seen flows go much more quiet in March and it will be more quiet in April and May," said Mr Tillman. "We don't anticipate flows returning to normal for several months, even with the government intervention in terms of money supply, which started last month."

Mr Tillman says that Chongqing, which has been growing even faster than the rest of China in recent years under Mr Bo's radical economic stewardship, is likely to be hardest hit. He points out that the Italian superbike manufacturer Ducati, which was snapped up by Audi last week, would have been a natural acquisition for one of Chongqing's giant motorcycle manufacturing firms.

"There is no way in my opinion that an Italian private equity firm would have sold Ducati to a company based in Chongqing right now," he said. "What's going to happen to these [motorcycle] companies as more things come out of this case?"

Derek Han, chairman of Blue Oak Global Holdings, a China-focused financial services company, agrees investors are likely to sit on their hands as the high-stakes political battle for China's future plays out ahead of a crucial leadership handover in October.

"Foreign investment will be a little more reluctant to make any major moves now," he said. "At the same time, within China nobody is going to make any major moves over the next couple of months, just as a matter of safety."

A Western businessman in China who asked not to be named reported that one large foreign investment deal in Chongqing fell through the day after Mr Bo was purged.

"There was no chance of making progress with their counterparts with whom they'd been talking for a considerable time," he said. "There was obviously total confusion in the ranks of officials."

Of course, there is much more going on in China at the moment than this vicious factional struggle. The ruling regime in Beijing is attempting to manage the nation's property market to a soft landing and, at the same time, shift the vast economy away from its unsustainable reliance on investment to consumption-driven growth. That too has probably undermined investor sentiment. According to China's reformist Premier, Wen Jiabao, this economic rebalancing effort is likely to reduce national growth in 2012 to 7.5 per cent. While such an expansion would have Western leaders in raptures, it would represent the lowest growth rate for China in a decade.

But assuming that the Bo case is helping to fray investor nerves, will this be just a bump in the road? Or could the alleged murder of Mr Heywood and the revelation of disharmony at the heart of the normally monolithic Communist Party have a longer-lasting negative impact on confidence?

Most business consultants operating in China dismiss Mr Heywood as a one-off, someone who got far too close to a powerful Chinese politician.

"I haven't heard about anyone being able to maintain that sort of relationship in modern China," said one. "He was a sort of a fixer," said another. "Things like fixers are a thing of the past. It's where China used to be 10 or 20 years ago. China's going more corporate, more institutional."

They also point out that Mr Heywood was an individual operating in China, rather than a representative of a Western multinational firm, meaning that the implications of his alleged murder will be limited.

And even those worried about the economic impact of the faction fighting in the immediate term expect it to fade in time.

"When the dust settles and all the lurid details are over, China's economic direction will be pretty clear. If anything that should encourage foreign investors," said Mr Han, reflecting a widespread belief that with the fall of Mr Bo, who was regarded by some as an economic leftist, the pro-Western economic reformist camp in Beijing is now in the ascendancy.

China investors have been through similar worries before. In 2010 a Chinese-Australian Rio Tinto executive, Stern Hu, was convicted of accepting bribes and stealing trade secrets. The closed trial in Shanghai that convicted Mr Hu caused some consternation at the time. But investors soon forgot the case and foreign investment resumed. The same could very well happen again.

Or then again, the faction-fighting could ratchet up to a new level. There have been rumours that Zhou Yongkang, the ninth most powerful member of the politburo and a reported defender of Mr Bo, could be next to be purged.

"While there's a knife fight in a telephone booth no one wants to stick their neck out and do anything major," said Mr Han.

The prospects for foreign investment in China could depend on how quickly that knife fight is settled.

The reformers: The men who brought down Bo

Xi jinping, Vice President

Set to replace Hu Jintao as the General Secretary of the Communist Party this autumn and become China's most senior politician. Assumed to be firmly in the economically liberal camp, but did visit Chongqing and praise Bo Xilai's stewardship last year.

Li Keqiang, Vice Premier

Expected to be next premier of the Chinese government. Li is tipped to take over from his political master, Wen Jiabao. Like Wen, Li is a market-orientated reformer who has pushed the need to promote consumption in China and to clamp down on corruption.

Wang Qishan, Vice Premier

In charge of economic, energy and financial affairs. Expected to be reshuffled upwards in the autumn. Chief negotiator with the United States. Staunch Western-friendly reformer. Described by one former UK diplomat as "a fine example of a man who can get things done".

Wen Jiabao, Premier

Delivered an indirect, but lethal, rebuke to Mr Bo last month when he said that a lack of reform could unleash a "new Cultural Revolution". Mr Bo had been promoting Maoist nostalgia in Chongqing. Technically a lame duck, but move against Mr Bo shows he has influence.

News
Russell Brand was in typically combative form during his promotional interview with Newsnight's Evan Davis
peopleReports that Brand could stand for Mayor on an 'anti-politics' ticket
News
The clocks go forward an hour at 1am on Sunday 30 March
news
Arts and Entertainment
The Doctor finds himself in a forest version of London in Doctor Who episode 'In the Forest of the Night'
TVReview: Is the Doctor ever going stop frowning? Apparently not.
News
Voluminous silk drawers were worn by Queen Victoria
newsThe silk underwear is part of a growing trade in celebrity smalls
PROMOTED VIDEO
Sport
footballMatch report: Real fight back to ruin Argentinian's debut
News
Candidates with surnames that start with an A have an electoral advantage
newsVoters are biased towards names with letters near start of alphabet
Arts and Entertainment
Isis with Lord Grantham (Hugh Bonneville)
TV
Arts and Entertainment
Jay James
TVReview: Performances were stale and cheesier than a chunk of Blue Stilton left out for a month
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Compensation and Benefits Manager - Brentwood - Circa £60,000

£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

Data Analyst/Planning and Performance – Surrey – Up to £35k

£30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Markit EDM (CADIS) Developer

£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

Day In a Page

Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
DIY is not fun and we've finally realised this as a nation

Homebase closures: 'DIY is not fun'

Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

Pumpkin spice is the flavour of the month

The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

Paul Scholes column

I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

While other sports are stalked by corruption, we are an easy target for the critics
Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?