The Olympic Economy
The Olympic Economy
By STEPHEN GREEN
FROM TODAY'S WALL STREET JOURNAL ASIA
August 7, 2008
Never in the history of sports has so much money been spent in 15 days. The $43 billion official bill for this month's Beijing Games is one-and-a-half times bigger than the previous five Olympics' bills added together. It works out at $2.9 billion per day, or $140 million per event.
And that is just the official spending. Beijing has laid down a lifetime of infrastructure in just three years, including several new metro lines, 37 new stadiums and a rather fabulous new airport terminal. Some $400 million has been spent on information technology alone. Then there are the other, less obvious, costs, including the several hundred temporarily shuttered factories, the tens of thousands of laborers unceremoniously sent home, all the air travel by sports fans and journalists, and a huge security budget. No expense has been spared for the Beijing Olympics. Literally.
Despite all this, for us economists, the Olympics is one big nonevent. We will enjoy the sports -- especially the beach volleyball in Chaoyang Park -- as much as the next spectator. But a couple of weeks of sports, even on this scale, will not boost China's growth or cause the economy to slow when it finishes. Neither will China's stock market take much notice.
To understand why, think about that $43 billion in context. Official investment spending in China in 2007 totaled $1.6 trillion. So assuming Olympic investment spending was spread out over three years, it hardly reaches 1% of annual investment spending. Many of the projects, like the metro, were needed anyway -- and that will remain the case in 2009 and beyond, as more work is done in Beijing and other cities, as well as in the countryside, to build out the railway infrastructure and the suburbs, the new locus of economic growth.
Much the same can be said about the Olympics' effect on consumption. Beijing expects around 500,000 visitors, roughly equivalent to the total number of tourists who visited Sydney for the 2004 summer Games. But again, that figure pales in contrast to the 11.6 million documented visitors China hosted in August last year -- without the attraction of the Olympics. Given restrictions on visas in recent months, it is not clear if total visitor numbers will even rise this summer as a result of the Games.
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All that said, the Games do come at an interesting time for Beijing and China's economy, more broadly. Economic growth is clearly slowing but official figures put consumer inflation above 7% annually. The real inflation figure is probably higher than that. Exports in real terms are now growing at only 7% annually, real investment growth has declined (particularly in the construction sector) and the stock market is some 50% off its peak.
The State Council last week restated its commitment to combating inflation. That means that most of the controls on bank lending will likely stay in place for a while, causing continued pain for a large chunk of corporate China. And it has made a lot of folks nervous that the tightening policies rolled out in October last year are now overstaying their welcome, particularly as the global economy slips. By the end of the year, Beijing will be looking to make monetary policy more stimulative. They already seem to have decided to slow down yuan appreciation.
Compared to the rest of Asia, China isn't as vulnerable to a global economic slowdown. According to European Central Bank research, some 70% of mainland China's demand comes from domestic sources. That compares with 65% domestic demand in Korea, 54% in Thailand, 49% in Taiwan, and 31% in Malaysia. Only Japan and Indonesia are less vulnerable to a collapse in external demand.
Still, exports have powered a good chunk of China's double-digit growth in recent years. Last year, net exports composed 16.3% of GDP and 2.5 percentage points of GDP growth. That figure is somewhat misleading, given that China adds roughly 50% of value to its exports through processing. If export growth fell to 7% year-on-year in 2008 from 21% last year, as we forecast, China's economy would lose two to two-and-a-half percentage points of growth. Then there are the second-round effects of an export slowdown on investment and consumption. Some 20% of investment, which makes up 40% of GDP, is export-related.
China's economy isn't on the brink of collapse. The economy will likely expand by more than 8% next year, and employment will continue to rise. If the global slowdown takes a turn for the worse, Beijing could launch a fiscal stimulus package, cut interest rates and encourage banks to lend. That said, no one really knows what two or three years of much slower global growth would mean for China. And there is clearly a rising risk of mismanaging policy in this more challenging environment.
None of this hinges on the Olympics. The Games may have sped up infrastructure spending and given a temporary boost to Beijing's bottom line, but that will be it, as far as the economics go. The challenge for China's economy comes from other quarters. The Olympics is the least of their worries.
Mr. Green is head of China research at Standard Chartered Bank in Shanghai.
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