WHEN Chinese political star Bo Xilai fell from grace earlier this year, the reverberations travelled as far as the Extension Hill mine, a $3 billion iron ore project in the remote Mount Gibson ranges of Western Australia.
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Even as details first filtered through in February that Bo’s most trusted lieutenant, police chief Wang Lijun, had driven seven hours through provincial back roads to seek asylum at the US consulate in Chengdu, Bill Mackenzie, the managing director of Extension Hill’s owners, Asia Iron, says he knew ”pretty well straight away” that it was bad news for his business, 10,000 kilometres away.

The mine is majority owned by a state-owned enterprise from Chongqing, a thriving city of 30 million people where Bo was party boss and now the scene of the ruling Communist Party’s worst political scandal in a generation.

Armed with a dossier of evidence proving Bo’s wife, Gu Kailai, had murdered British businessman Neil Heywood, Wang fled in fear of his life, having fallen out with Bo.

After months of intrigue, innuendo and mostly silence over the case, the central government has moved to put the controversy to bed before a key leadership transition next month. Gu was found guilty of murder and has been handed a suspended death sentence, while Wang was jailed for 15 years last month for defection and receiving bribes, among other charges.

Bo, a scion of one of the most powerful political dynasties in China, was formally expelled from the Communist Party last week. He is under investigation for ”serious party discipline violations” and the enigmatically euphemistic charges of ”maintaining improper sexual relationships with multiple women”.

Asia Iron’s Extension Hill project, meanwhile, has been at a standstill for most of the year, with Mackenzie’s Chongqing shareholders unable to proceed with its investment while the city’s leadership is in flux.

”We’re waiting,” Mackenzie tells BusinessDay. ”It hasn’t been delayed [because] there’s a collapse in the market or cost blowout or anything – it’s delayed because they can’t make a decision until the leadership is bedded down in Chongqing. ”I can only deal with the things that I can deal with in Australia, and our board is still waiting on some direction.”

The delays at Extension Hill are but a glimpse at the potentially far-reaching consequences the political uncertainty and fratricidal infighting between Chinese leaders could have on an Australia, whose economic fortune is increasingly tied to the unpredictable ways of the Middle Kingdom.

The dilemma of how to deal with the Bo scandal has contributed to a delay to the generational leadership transition. Originally expected this month, the highly ceremonial process will now kick off on November 8.

The new leaders will take charge of the world’s second-largest economy (likely to become the largest during their tenure), the largest military and the most populous nation for the next decade.

The scale of change is pervasive, cutting across key political, economic, military and commercial positions – the equivalent of Australia getting not only a new prime minister and cabinet, but also fresh leadership teams for the Reserve Bank, the High Court, all government departments, the military, and the largest corporations in the country.

What is clear to many people in and outside of China is the country has reached a crossroad in its long march to prosperity. China needs urgently to implement big economic, social and political reforms to continue its development and maintain a cohesive social fabric.

The challenges are daunting. An outdated economic model reliant on export and investment is in desperate need of a new engine of growth. Widening wealth disparity is threatening to undo years of reform.

When the People’s Republic of China was founded more than 60 years ago, one of its avowed goals was to eradicate inequality and turn the Middle Kingdom into a workers’ paradise.

The Gini coefficient – a gauge of income inequality – has reached an alarming reading of 0.48. Workers’ legitimate rights and benefits have been regularly ignored and suppressed, and the government-sponsored and controlled unions are impotent, rarely standing up to powerful state-backed employers.

In one of Wen Jiabao’s final public speeches in March, he highlighted corruption as the greatest risk in undermining the legitimacy of the ruling party, raising many eyebrows with a thinly veiled attack on Bo Xilai.

Professor Richard Rigby, an Australian National University academic and a veteran diplomat who only recently retired as Australia’s top intelligence official on Asia, said the leadership change ”is at least the biggest in the last 30 years if not longer”.

At the apex of this generational leadership change is Xi Jinping, the heir presumptive to the most powerful position in the country as the secretary-general of the Chinese Communist Party, and Li Keqiang, a protege of the current party boss Hu Jintao. Li is widely tipped to succeed Premier Wen.

Having had ”hours of conversation” with Xi before, during and after his tenure as prime minister, Kevin Rudd believes Xi is the right man to steer a more reform-minded leadership.

”The cornerstone of this will be China’s new president and party secretary general, Xi Jinping, who has sufficient reformist, party and military background to be very much his own man,” Rudd said in Brisbane on Thursday, where he delivered a major speech on China.

But Rigby says Rudd’s assessment of the future may be optimistic. China has moved on from a Maoist style of charismatic leadership to a more collective leadership where Xi could be just first among equals. “[Xi] is going to have a tough time, the overall move has always been to greater collective leadership; the role of individual leader has been whittled away successively,” he says.

”As leadership becomes more collective, you are going to need consensus. Consensus is not always easy to get, especially when it comes to really difficult issues. The next stage of reform is going to involve taking on some very, very powerful vested interests.”

Featuring prominently among these powerful vested interests are China’s state-owned enterprises, corporate behemoths that often dwarf even the largest of Western companies.

State-owned enterprises dominate the Chinese economy, often at the expense of China’s private sector and Chinese consumers.

Many of the ”red capitalists” heading these companies enjoy ministerial positions and exert strong influence in setting national strategy, including foreign policy.

It is for this reason that the World Bank has identified the reform of the state-owned sector as a key priority for China. But taking on these bastions of privilege is no easy task, and the reform of the state-owned sector is more a political than an economic challenge.

”This is going to be tough. There is a strong nexus of power and money there,” Rigby says. ”Plenty of people in China understand what needs to be done; the question really is, will there be a leader who both understands what has to be done and has the ability to push these changes through.”

Kenneth Chern, a former Asian policy director at the National Security Council of the White House, says he expects the next generation of leaders to consign substantive political reform to the too-hard basket, at least initially.

”I think they will undertake economic reform first to show their capabilities and to get political traction and a sense of authority,” he said, ”I think political reform is very hard to do with any quick action or results.”

If Rudd’s assessment is correct, the leadership change provides an opportunity for China to accelerate political reform and then China will be on track to enjoy many more years of spectacular growth. However, it is also likely that a group of collective leaders with different and competing interests will be slow to implement the necessary reform.

Back in his office in West Perth, Bill Mackenzie is still waiting. He says he is none the wiser about when his Extension Hill project is likely to go ahead, despite the imminent leadership transition, but says his backers have unwavering support.

The lack of information has fuelled the rumour mill, with some suggestion the Chongqing shareholders have close ties with Bo and have been caught up in the scandal.

”I’ve been to dinner with them so I can categorically deny that one,” Mackenzie says. ”My board and my shareholders are senior executives in their organisation, but they’re not part of the leadership of Chongqing per se.”

Mackenzie says it is natural for decision-making to slow down when a power transition of these proportions is made for the first time in a decade.

”Everybody needs to take a deep breath and understand that politics and business are very closely linked in China, much more so than any other place because of the large dominant state ownership,” he says. ”I guess what happened with us is things started to slow down a bit earlier because of Wang Lijun and Bo Xilai – Chongqing probably slowed down quicker than the rest of China. I think all of China is probably sitting back waiting at the moment.”

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