Will China nurse an ‘Olympics hangover’?

Economy is slowing down, but it has nothing to do with the Olympics, say economists

HONG KONG: You might call it ‘voodoo economics’, but there’s compelling evidence of an ‘Olympics curse’ on countries that host the sporting extravaganza.

Virtually every country that has hosted an Olympics since the Second World War has seen its GDP growth fall in the year following the quadrennial event. The only exception to this rule was the US, which registered a marginal growth in GDP in 1997, the year after it hosted the Olympics in Atlanta.

This year too, as China’s economy shows signs of slowing down in response to a sharp slowdown in its principal export markets - the US and Europe - it appears that the
‘Olympics curse’ on the host nations will come true.

On the face of it, there appear to be reasons to support this theory. For seven years, since it won the rights to host the Beijing Olympics, China has spent $40 billion in an orgy of construction —- of stadiums and public transport systems, in general, on urban renovation.

And as all this winds down with the Olympics, as the guests from overseas leave Beijing after a lavish party, will the country nurse a ‘hangover’?

Nonsense, say economists at leading financial institutions. China is slowing down, they acknowledge, but it has nothing to do with the Olympics, and the timing is largely coincidental.

“The suggestion that China will experience a post-Olympics slowdown has become a focus of concern, with many pointing out that host nations typically experience slower growth after the Games,” notes Jing Ulrich, chairman of China equities at JP Morgan Securities.

China’s economy is indeed at a turning point, acknowledges Ulrich.

“Economic growth is slowing toward the single-digit realm, as export growth slows and the trade surplus narrows. Recent data suggest that the slowdown from the export sector may be rippling across the economy. New orders at factories have declined and the country’s property market has seen a sharp drop in transaction volumes.”

But, adds Ulrich, “in reality, China’s economic and financial market challenges have little to do with the Olympics, and more to do with slowing global demand, rising input costs and domestic imbalances.”

Even Beijing’s $40 billion investment in infrastructure to host the Games “amounts to merely a tiny fraction of China’s fixed asset investment.”

UBS China economist Tao Wang too makes the point that while China’s GDP growth is likely to slow down after the Olympics, “we don’t believe it will be caused by Olympics-related activities.”

In fact, Wang points out, the slowdown in China’s growth has been under way for the past few quarters. “Growth peaked in the second quarter of 2007, when real GDP grew by 12.6% year-on-year, propelled by both strong domestic investment and exports. Since then, growth has slowed every quarter, reaching 10.1% year-on-year in Q2 2008.”

Fears of a post-Olympics slump are overblown, says HSBC economist Frederic Neumann. Given the size of China’s economy, the Games aren’t “terribly important”, he adds.

Morgan Stanley’s China economist Qing Wang observes that Beijing’s contribution to
China’s GDP is only about 4%, far less than the contribution of most other Olympic host cities to the respective national GDP. Indicatively, Athens (which hosted the Olympics in 2004) accounted for 50% of Greece’s GDP; and Seoul (which hosted it in 1988), accounted for nearly 45% of South Korea’s GDP. On that scale, Beijing’s contribution is relatively small, he notes.

Moody’s Economy.com economist Sherman Chan says that in fact,  China’s Olympics-related spending on infrastructure will improve its long-term competitiveness. “Better airport facilities, subway networks, roads and recreational venues will all help to support continued rapid development.”

A buoyant domestic demand and an infrastructure boom suggest that the slowdown in China will be less severe than Olympics pessimists predict, points out Ulrich.