Is China Ready for a Post Olympic Downturn?
china Olympics games
By Guneet Singh Sahni
Emerging Markets Asia

Last week, China reported its first half of '08 GDP growth ran at a rate of 10.4% Y/Y, the slowest pace seen over the last 3 years. Relatively speaking though, it was still one of the highest among the world's economies. Going forward, we have to ask how long China can sustain its double digit growth rate? High overall inflation, rising commodity prices and slowing exports are expected to put the brakes on the Asian giant.

On the other hand, the Olympics will give the economy a short-term boost by increasing aggregate demand. However, a Bank of China survey of the last 12 Olympic Games shows most host nation economies have suffered a post Olympic economic downturn, which has been termed by economists as – "Valley Effect."

Japan and South Korea, which were enjoying double-digit growth in the period running up to Olympics, slowed down by more than 2% Y/Y after the Tokyo Olympics in 1964 and the Seoul Olympics in 1988, respectively. So we wonder if China is equipped to ward off the Valley Effect.

Tightening monetary conditions are already expected to cool an overheated economy. We believe that the solution to Chinese problems of speculative high capital inflows, falling exports and high inflation best lie in a "soft landing" of the economy rather than a steep fall.

China Equity Market Briefing

The government’s economic policies led to a cooling down of GDP growth for the fourth straight quarter, which recorded a growth rate of 10.1% Y/Y in second quarter. This represented a 0.5% sequential decline. The Consumer Price Index rose 7.1% in June, down from 7.7% in May. This slower growth led to the biggest drop in the yuan in seven weeks; expectations grew that the government will slow the currency appreciation to protect exporters. Despite the slowdown, the economy’s growth is in line with the government’s primary target, which is to prevent an overheating of the economy.

China has witnessed increased investment in infrastructure ahead of the Olympics, which will boost the productivity of its economy. Additionally increased tourist inflow will lead to higher consumption and demand for goods and services. However, after the Olympics ends, the biggest challenge for the government will be to ensure a soft landing of economic activity and not a sharp drop. The biggest challenge for the Chinese government will be to balance its tightening monetary policy and investment in the Olympics, so that the slowdown from monetary policies and post Olympics syndrome don’t lead to a sharp downfall.

World class infrastructure to boost growth

In preparation for the Olympics, China has invested nearly $40 billion in infrastructure from 2002 to 2006. This will help it to maintain its productivity in terms of better connectivity and transport after the Olympics. High investment and consumption will boost aggregate demand. We note that the Chinese economy, despite its size, has been growing strongly before Olympics effect, and so the percentage increase in economic activity as a result of the Olympics Games should be relatively small as compared to the aggregate increase.

Sporting facilities and the "White Elephant" effect

Beijing has been forced to reduce other infrastructure projects in order to concentrate on the construction of sports venues. Athens and other host city Olympic stadiums have gone mostly useless after their Olympic games... This has been termed by economists as the "White Elephant Effect." Beijing plans to convert these venues to serve residents as sports and entertainment facilities. As per the Director of the National Economic Research Institute at the China Reform Foundation, Beijing's investment to build sports venues and other infrastructure accounted for a mere 3% of the country's total investment in fixed assets.

Tourism to further put upward pressure on yuan

Beijing expects to receive about 400,000-450,000 overseas tourists during the Olympics, and analysts believe this could bring in $400 million in revenues. A lot of tourists from within China are also expected to arrive, which will also boost consumption. We believe that the tourist influx will put some upward pressure on the yuan apart from spiraling inflation.

Hotels to cash in the Olympics boom

The number of hotels in Beijing has also jumped in recent years since the country reduced hotel ownership restrictions to expand capacity. Starting in 2006, wholly-foreign-owned hotels were permitted to be established. These moves cleared the way for an extensive expansion of foreign-owned hotels and other tourism facilities. The average cost of a hotel room in Beijing was $127 a night in 2007, while the city’s occupancy rate was 70.8%.

However, as per recent reports from the Beijing Tourism Bureau, hotels are facing tough competition due to oversupply that was built just ahead of Olympics. With some exceptions in top end hotels, the industry is also reporting below expected occupancy rates.

Real Estate

The Beijing Tourism Authority predicts the city will be flooded by 3.5 million visitors, both domestic and international, during the games. Hotels and houses for rent are going quickly, and insiders say that rental rates during the Olympics will be 10 times the usual amount. Conscious of the investment opportunity, Beijing residents have been grabbing up as much real estate as possible to prepare.

Thursday's U.S. EPS Reports:

Thursday's abbreviated earnings schedule includes reports from 3M (NYSE: MMM), Abaxis (Nasdaq: ABAX), affymetrix (Nasdaq: AFFX), Alaska Airlines (NYSE: ALK), AmeriSourceBergen (NYSE: ABC), Arctic Cat (Nasdaq: ACAT), Ashland (NYSE: ASH), AutoNation (NYSE: AN), Ball Corp. (NYSE: BLL), Becton, Dickinson (NYSE: BDX), BMC Software (NYSE: BMC), Bristol-Myers Squibb (NYSE: BMY), Brunswick (NYSE: BC), Burlington Northern Sante Fe (NYSE: BNI), Cabot Oil and Gas (NYSE: COG), Cache (Nasdaq: CACH), Cash America Int'l (NYSE: CSH), Celgene (Nasdaq: CELG), Chubb (NYSE: CB), Cohu (Nasdaq: COHU), Credit Suisse (NYSE: CS), Daimler (NYSE: DAI), Diamond Offshore (NYSE: DO), Dover Motorsports (NYSE: DVD), DSP Group (Nasdaq: DSPG), East West Bancorp (Nasdaq: EWBC), Eastman Chemical (NYSE: EMN), Ecolab (NYSE: ECL), Eli Lilly (NYSE: LLY), Encana (NYSE: ECA), Federal-Mogul (Nasdaq: FDML), Federated Investors (NYSE: FII), Ford Motor (NYSE: F), Foundry Networks (Nasdaq: FDRY), Franklin Resources (NYSE: BEN), Friedman Billings Ramsey (NYSE: FBR), Global Payments (NYSE: GPN), Goodrich (NYSE: GR), ImClone (Nasdaq: IMCL), J&J Snack Foods (Nasdaq: JJSF), Janus Capital (NYSE: JNS), Juniper Networks (Nasdaq: JNPR), Kennametal (NYSE: KMT), Kimberly Clark (NYSE: KMB), Lab Corp. (NYSE: LH), Level 3 Communications (Nasdaq: LVLT), Mathews Int'l (Nasdaq: MATW), Medco Health (NYSE: MHS), National City (NYSE: NCC), Newmont Mining (NYSE: NEM), Occidental Petroleum (NYSE: OXY), Penn National Gaming (Nasdaq: PENN), Pool Corp. (Nasdaq: POOL), Potash Corp. (NYSE: POT), RadioShack (NYSE: RSH), Raytheon (NYSE: RTN), Smith Int'l (NYSE: SII), Taser Int'l (Nasdaq: TASR), The Cheesecake Factory (Nasdaq: CAKE), Dow Chemical (NYSE: DOW), Travelzoo (Nasdaq: TZOO), UST (NYSE: UST), VCA Antech (Nasdaq: WOOF), Xerox (NYSE: XRX) and Zebra Technologies (Nasdaq: ZBRA).

Article interests AMEX: DIA, AMEX: SPY, AMEX: SDS, AMEX: DOG, AMEX: QLD, Nasdaq: QQQQ, NYSE: NYX, Nasdaq: ASIA, Nasdaq: PRASX, AMEX: PUA, AMEX: NWD, Nasdaq: MEAFX, Nasdaq: EBASX, Nasdaq: EVASX, Nasdaq: MACSX, Nasdaq: MATFX, AMEX: CZJ, Nasdaq: CHINA, PCX: FXI, PCX: CYB.

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