China’s Olympic Boom?
Many people are wondering about the effect the Beijing Olympics may have on China’s economic growth specifically:
- Has China’s rapid growth over the past five years been driven in part by the Beijing Olympics?
- Can China expect any economic boost from the Olympics?
- Will China suffer a post-Olympic economic slump?
Well let’s have a closer look.
Has China’s rapid growth over the past five years been driven in part by the Beijing Olympics?
It’s important to keep the Beijing Olympics in context. China is a huge land mass and a large economy. Beijing accounts for less than 4% of Chinese GDP and even if Beijing doubled its level of activity it wouldn’t have much impact on the overall Chinese economy.
China has over 50 cities with populations in excess of 2 million and at least six with populations in excess of 10 million. Each of them is experiencing high levels of growth and development. Beijing, with its population of some 15 million, is just one of many cities to witness rapid growth.
So what is driving China’s rapid growth? The key developments have been urbanisation and industrialisation. From these a tidal wave of investment in transport systems, factories, office blocks, homes, schools, hospitals and power stations has emerged.
From 2003 to 2007, it is estimated that around US $5,800 billion has been spent on these projects. Of this, ‘only’ US $35 billion has been spent on projects related to the Beijing Olympics, including an upgrade of Beijing’s infrastructure. Without doubt, preparations for the Olympic Games have added to activity, especially in Beijing, but the ‘China story’ is so much more.
The process of modernisation has been underway in China since the mid-1970s and its momentum has been growing. Changes to agriculture and a shift away from communes has led to improved food security, while relaxation of internal travel restrictions has allowed movement of workers to towns and cities.
The Chinese government has acknowledged the role private enterprise (both domestic and foreign) can play in modernisation and lifting incomes across the country. The combination of foreign investment, high levels of domestic saving and a government intent on bringing its nation fully into the 21st century has unleashed the forces of economic growth that allowed it to bid for the Olympic Games. China has a long way to go and the Games are just one step down a long path.
Can China expect any economic boost from the Olympics?
There can be some economic upside from hosting the Olympic Games – provided the Games run smoothly. The Beijing Olympics represent an opportunity to showcase modern China. The Games themselves send a signal that China wants to be a partner in the western world and, significantly, many of the contracts for Games related projects have gone to western companies. China wants the best and sometimes that means going beyond its shores.
The Beijing Olympics are part of the process of modernisation that has also seen China become part of the World Trade Organisation (WTO). Membership of the WTO brings with it the obligation to follow certain trading rules that should help China integrate with the rest of the world.
There will also be a short-term boost to tourism in China along with a boost in the sale of Games ‘paraphernalia’. But more importantly, the Games create opportunities for business networking. Deals can be completed, relationships formed and understandings widened. Although the spin-off from such activity may not be immediate, it can certainly be real.
Will China suffer a post-Olympic economic slump?
On the basis that the short-term boost will be modest, likewise any short term slump would also be modest. Indeed, if manufacturing activity is curtailed in Beijing for the duration of the Games, then resumption of normal activity may see economic activity pick up.
As in Australia, the Chinese central banking authorities have been trying to restrain growth to curb inflation, both via higher interest rates and by more direct restraints on bank lending. Such efforts can be overdone and could lead to a sharper slowdown than might have originally been expected.
Having said this, it must be acknowledged that China is growing for structural reasons. Its economy is slowly liberalising, urbanising and industrialising. These factors are generating enormous economic energy and growth. China, however, is not without its risks. Environmental, health and wealth distribution issues are creating social tensions that need to be resolved. The government still controls large portions of the economy and corruption remains an acknowledged problem. These will not stop the emergence of China but they must make us pause for thought. China will provide investment opportunities and challenges well after the Olympic flame is extinguished.
Source: Article kindly provided by Hans Kunnen, Head of Investment Markets Research at Colonial First State, April 2008
This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. RetireInvest strongly suggests that no person should act specifically on the basis of information contained herein but should obtain appropriate professional advice on their own personal circumstances. Materials are published by RetireInvest Pty Limited. RetireInvest Pty Ltd ABN 23 001 774 125, AFSL 238429 is owned by ING Australia Limited ABN 60 000 000 779.