Beijing Olympics: 'Negligible' Economic Impact

If you add up the total of $40 billion in Olympics-related spending in the past four years, it accounts for an average of only 0.3% of China's total GDP each year

By Chi Lo

The Olympic Games are finally underway in Beijing. Without doubt, it is an important event with a lot of preparation gone into it over the past few years. But, contrary to common perception, the impact of the Olympics on China's growth and economic policy should be negligible. In particular, the recent concern about a post-Olympic investment slump, as the Olympic-related investment spending winds down later this year, is totally naïve. There are many crucial issues with regard to the Chinese economy that people should worry about after the Olympics, but the Olympics' impact is not one of them.

Beijing would have had to be an economic heavy-weight in China for it to influence national economic growth. However, its population is only 1.1% of the national total; its economic output is less than 3% of national GDP. Even if you tally up the estimated Olympic-related spending in the past four years, which amounted to a total of about $40 billion, it accounted for an average of only 0.3% of China's total GDP each year. This is hardly significant in the national context.

Further, there has been no spillover effect on investment outside Beijing. The capital's investment spending growth has been lagging behind the national average, in spite of the Olympics. In 2007, Beijing's investment spending accounted for only 3% of the national total, down from over 5% in 2001 and 2002. Thus, the demand for commodities and investment that is related to the Olympics is very limited to start with.

There is also a view that Beijing has been holding off economic adjustment policies until after August this year in order to keep social stability in the run up to the Olympic Games. The aim is to show the country's economic achievement and prosperity. This is nonsense. Evidence since 2004 has shown that Beijing had been quick to take economic cooling measures as soon as it feels economic growth might have been overheated.

The latest round of tightening measures saw six interest rate hikes and 10 bank reserve requirement ratio hikes throughout 2007, with the severity of the tightening increasing towards the end of 2007. The central bank has hiked the bank reserve requirement ratio five times so far this year, taking the ratio to a record high of 17.5%.

There are other, more relevant, economic fundamental factors affecting the China's economic and financial outlook this year, including a decline in corporate profits, the collapse of A-share prices, a property bubble and unclear macroeconomic policy steering the country through the global slowdown. These concerns are valid, but they should not be exaggerated.

China's overall industrial profit growth slowed to 21% in the first five months of this year from 43% in the same period last year. This sharp drop has mainly been driven by the profit slump in the oil refining and utility sectors, which account for an average 15% of China's total industrial profits since 2004. These two sectors have reported heavy losses recently due to surging input costs (notably for oil) and government controls that bar them from raising output prices. Recent electricity and fuel price hikes by Beijing (as well as future price liberalisation) should offer some relief to these sectors, but the near-term outlook remains poor. Excluding the oil and utility sectors, industrial profit growth actually rose slightly to 27% year-on-year in the January-May period from 25% last year.

While a fall in profit growth certainly hurts stock prices, the sharp drop in A-share prices since October has mainly been a result of the asset bubble bursting. Beijing's inaction to the market turmoil has aggravated the A-share price fall by dashing hopes of any bailout measures. The current market correction process resembles the bursting of Hong Kong's red-chip bubble between 1994 and 1999.

Arguably, the A-share price slump is a violent process of the market reverting to its long-term trend. Just as the share prices overshot their long-term average on the way up in 2006 and 2007, they could undershoot in this violent correction. But this share price correction is not an omen for deteriorating economic fundamentals in China.

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