Chongqing's economic growth starting to look like an illusion
In November last year some of the biggest figures in the world of private equity gathered in the Grand Hyatt hotel in Wan Chai to discuss the future of their business.
But although they were meeting in Hong Kong, many of the assembled billionaires had another city on their minds, one where a dynamic economy and an obliging government promised the sort of double-digit returns that really get private equity barons salivating.
In five years' time, gushed Jim Coulter, co-founder of US private equity giant TPG, the industry's leaders wouldn't be meeting in Hong Kong, but rather in Chongqing, because that's where the most compelling investment opportunities would be found.
To a certain extent, Coulter was simply talking his own book. TPG opened a Chongqing office in 2010 and announced the establishment of a 5 billion yuan (HK$6.1 billion) fund set up in partnership with a Chongqing government investment company. Still, he had plenty of eager listeners.
Chongqing has been widely touted as an up-and-coming manufacturing centre in recent years, cheaper than China's pricey coastal provinces, but still connected to the rest of the world. Investment in the municipality's factories and infrastructure has shot up, and Chongqing's exports to foreign countries doubled in 2011.
As a result, Chongqing municipality grew faster than all the mainland's provinces last year, recording gross domestic product growth of 16.4 per cent (see the first chart). And that performance was no flash in the pan. Over the past five years Chongqing's annual growth has averaged 15.8 per cent, a rate topped only by the booming coastal municipality of Tianjin and Inner Mongolia, which is enjoying a commodity bonanza.
Yet sentiment soured quickly. Just a week after Coulter made his remarks, British businessman Neil Heywood was found murdered in his Chongqing hotel room, triggering the chain of events that led to the sacking last month of Chongqing's party boss Bo Xilai.
Now following Bo's fall, analysts and investors are anxiously reviewing the municipality's rapid growth and asking whether its economic promise will turn out to be nothing but a fragile illusion.
As in other regions, economic growth in Chongqing has been powered primarily by investment. From 313 billion yuan in 2007, the year Bo took over, investment in fixed assets shot up to 760 billion yuan in 2011 - impressive for a municipality whose total GDP was only 1 trillion yuan.
Such heavy investment could be considered good news if the capital were being pumped into productive projects, but that's doubtful. In 2010 by far the biggest portion of the municipality's investment - some 30 per cent - went into its property market. And much of that investment was funded by debt. Unfortunately, working out how much is impossible. The data simply aren't good enough.
But during Bo's time in charge the Chongqing's government's expenditure far outstripped its revenues (see the second chart). Meanwhile, anecdotes abound of massive lending by state banks to Chongqing government-linked investment companies; loans that were collateralised by grants of over-valued building land. Estimates of the magnitude of these debts vary anywhere from 40 to 100 per cent of the municipality's GDP.
Bo's economic strategy may have produced stunning headline growth rates during his time in office, but the fear is that with Chongqing's property bubble now well and truly burst, many real estate projects will fail to generate an economic return. If so, the local government's investment companies will be unable to service their debts, and a sizable proportion of the loans on the banks' books will turn bad. That will curtail the banks' ability to make new loans, which will drag down the municipality's growth rate.
Suddenly, Chongqing's economic potential will begin to look a lot less spectacular - and the municipality will look a lot less attractive to Jim Coulter and his private equity pals. That 2016 meeting just may have to be postponed indefinitely.