The parallel rise of China's Bo Xilai and a business ally

DALIAN, China, April 25 Wed Apr 25, 2012 7:39am EDT

DALIAN, China, April 25 (Reuters) - The wide-open sweep of the Xinghai Plaza in the Chinese port city of Dalian is the legacy of Bo Xilai, th e dynamic former mayor who was China's most openly ambitious politician, and who is now at the center of China's biggest political scandal in decades.

The plaza is also associated with multi-millionaire Xu Ming, described by executives as Bo's closest business ally, who is in detention as well. The contract he won during the construction of the plaza was the start of a relationship that authorities are now investigating as part of a wider probe into Bo's business and political allies.

The alliance between Bo and Xu was a prime example of "guanxi networks", business people say, or the personal relationships that lubricate much of China's economy.

A search of public records has not revealed any public financial links between Bo and Xu's businesses. But Xu's companies won contracts when Bo was Dalian's mayor and his businesses prospered as the politician moved up the political ladder, the sources and media said.

"We were never told they were close because we never needed to be told," said an industry executive, who met both men separately to discuss investment projects.

Bo was stripped of his position as head of the Communist Party in Chongqing, China's biggest municipality, and banished from the top ranks of the party, after his wife was named as a suspect in the murder of Briton Neil Heywood.

His ouster has rocked China's plans for a smooth leadership handover later this year.

Xu first met Bo in the early 1990s when he provided the landfill to build the Xinghai Plaza on a polluted estuary, business people in Dalian said. Xu was detained on March 14, the day before Bo was stripped of his Chongqing post, three sources told Reuters.

Beijing has not commented on Xu's whereabouts and has not confirmed his detention.

Bo had launched a campaign for a position on the Politburo Standing Committee, China's top-most decision making body, which will be decided later this year.

But Beijing is now moving to discredit him and contain the most divisive issue facing the Communist Party since the crackdown on student-led demonstrations in 1989.

In a news conference days before his detention, Bo said unspecified enemies were vilifying his policies and family.

"The centre wants to take down Bo so it needs to investigate any illicit commercial relations," said Jin Zhong, a politics watcher and editor of Open Magazine in Hong Kong, referring to the Communist Party.

Before his fall from grace this year, Bo's career took him from Dalian, where he was mayor from 1993 to 2000, to the Commerce Ministry in Beijing, and finally to Chongqing, in southwest China.

Xu's plastics-to-soccer conglomerate, Shide Group, got its start in Dalian. As Bo moved to Beijing, Xu also went national with life insurance investments and ambitious petrochemical projects. He registered construction companies in Chongqing after Bo took office there.

Since Xu's detention, Shide has said its operations remain normal and that it still enjoys the support of the government and banks. It was responding to a report last week by China's Caixin magazine that 38 banks were exposed to about 7 billion yuan ($1.11 billion) in Shide Group debt.

EARLY PARTNERSHIP

When he first caught Bo's attention , Xu was a young entrepreneur running a landfill and shrimp company in the coastal city of Zhuanghe not far from Dalian, according to business people and several media profiles.

The Dalian government chose Xu's company to provide landfill for the plaza project. Xu later bragged to Chinese media that he had made 30 million yuan on the deal, a huge sum at the time.

The plaza opens onto the sea, and is dominated by a Ming Dynasty-style pillar that residents proudly say is bigger than the pillars in front of the Forbidden City, the Beijing landmark that housed China's emperors.

Bo was an energetic mayor, a rising political star who courted foreign investors. One diplomat recalled that on hearing his delegation had failed to meet decision makers, Bo tapped his network and within hours had organised a banquet of officials and entrepreneurs.

He chose Xu's company to partner in a joint venture with a foreign investor, media say. That joint venture eventually became Xu's flagship company, Shide Group, which initially specialised in window frames.

Shide won a lucrative contract - to replace the window frames of Dalian's government offices. From that base, Shide grew into one of China's largest PVC frame makers, the company's sales presentations say.

Xu was typical of many relationship-based entrepreneurs in China in the 1990s, relying on connections more than capital markets to borrow.

"Ten years ago, you could succeed by doing one thing only, in other words just playing the guanxi game," said an analyst familiar with Xu Ming's business.

Forbes estimated Xu's worth at $1.05 billion in 2005, ranking him as the eighth richest Chinese at the age of 34. By 2010 he had dropped to No. 231 in the list with $650 million. During that period he exited some holdings and increased competition squeezed profit margins of the plastics business.

In 2000, Shide bought Dalian's popular football team for 120 million yuan after its previous owner pulled out of its investment because of concern that the image of Chinese soccer was being tainted by a matchfixing scandal.

But the team was so central to Dalian's image as a youthful, fun city that a giant sculpture of a soccer ball dominated one downtown square.

"Bo wanted the soccer club to be great. Xu ponied up the money," the industry executive said.

Shide's Dalian team is one the clubs named in ongoing bribery trials in China.

The group expanded into national businesses, investing in banks and life insurance, after Bo became commerce minister, a post he held between 2004 and 2007, Dalian business sources said.

By the time Bo become Communist Party chief for Chongqing in 2007, Chinese central policy was favouring state-owned firms and limiting credit flows to the private sector.

As part of a nationally publicised crackdown on organised crime, Bo's police force aggressively pursued many of the city's entrepreneurs, in some cases confiscating their assets.

Undeterred, Xu followed Bo to Chongqing, using overseas holding companies to set up Shenghe Construction in Chongqing in 2009. Shenghe partnered with Shide on a big real estate development in the northern city of Harbin, according to corporate filings.

A Chongqing businessman with direct knowledge of a Shide-backed project in Chongqing's northern suburbs said the district party secretary "must have followed instructions in awarding the tender, knowing that Shide is a good partner of Bo".

LASTING NETWORKS

Alongside Bo as he built his network of connections was his wife, a high-powered lawyer now being held on suspicion committing or arranging Heywood's murder in November following a financial dispute.

Gu operated the Horus Consultancy in Dalian with business partner Larry Cheng. Exiled journalist Jiang Weiping, jailed for writing about corruption involving Bo's relatives, said her Kailai Law Firm and the consultancy business were conduits for investors seeking access to Bo.

Cheng left Dalian in 1999, and opened a new firm with the same Chinese name in Shanghai, with Xu Ming as an investor, he told Reuters. His firm advises Taiwanese on investing in the Yangtze River Delta.

"He is my friend. When I opened up a business in Shanghai, the easiest way is to get a local firm in a joint venture, it's faster to get approval, so I asked my friend Xu to invest," Cheng said. He declined to comment on Bo, Gu or Heywood.

To prevent officials from building such powerful "guanxi" or relationship networks, China has tried to rotate top leaders every few years.

But Bo was able to build lasting connections partly because he remained in or near Dalian for 20 years, said Chinese politics scholar Bo Zhiyue of the National University of Singapore.

"It's not easy. If you move on, your successor will come in and replace your people with his people," the scholar said. ($1=6.30 yuan) (Additional reporting by Brian Rhoads, James Pomfret and Sisi Tang in Hong Kong; Editing by Don Durfee and Neil Fullick)