Recession after the Olympics?
March 3rd, 2008 - by Nazia Vasi
Will the Chinese economy face gloom after the Olympic torch is blown out in Beijing?
Many economists argue that China’s current economic boom is mostly due to the build up for the Olympics and when the lights die out on the years largest sporting event, money too will dry up.
Recently released global statistics by Morgan Stanley analysts Stephen Jen and Luca Bindelli back this up - The striking common feature is an acceleration in GDP growth in the year in which the Olympics were held, followed by a year of sub-par growth. Of the 11 cases examined since 1956, only the US (Atlanta) in 1996 did not show a slowdown following the Olympics. The slowdown was particularly stark in Australia (1956), Japan (1964), the US (1984) and Korea (1988). Spain actually fell into a recession in 1993. In the two most recent Olympics (Athens and Sydney), both Greece and Australia decelerated by 1.5-2.0% between the year before and that after the Olympics.
According to one analyst “Even though China has raised interest rates and their reserve-requirements ratio … it really hasn’t done very much to rein in the monetary aggregates.” That probably means that banks will have to further tighten credit and try to keep the out-flow of money into the economy at a dull roar.” If credit in China is tightened by the central government much of the capital which has fueled the run in the stock market and real estate will be wrung out of the economic system. It is often said that stock market activity is a leading indicator of recessions and recoveries. The Shanghai Composite is down 15% over the the last three months after being up almost 100% over the nine months prior to that.
A recession in the west means that large companies like Wal-mart will cut inventory coming from China as their US sales flatten. Demand for everything from auto parts to garden hoses is going to fall, perhaps precipitously.
Futher, China has also been willing to underwrite the cost of energy, buying oil on a market where crude is over $90 a barrel and selling by-products like gas and diesel at a fraction of where a real supply-and-demand market would mark their prices. That means that the real rate of inflation in China may be closer to 10% without the government’s hand in the economy.
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March 3rd, 2008 at 12:44 pm
I think you are the first raising this question, and it is one that people have discussing for all my time in China.
right now, I don’t see it. If there were a deep recession in the U.S., or the global markets, then the odds increase. However, as economists have been saying that China’s inflows of investment are too hot anyway, I find it interesting that they are now saying a slowdown will be a bad thing.
In the end, what I look to is the growth of the 2nd and 3rd tier cities. they have been historically separate from export markets and cities like Kunming, Chongqing, Changsha, etc have developed a much more local flavor. A lot of investment is coming from the government (as usual), and there are significant investments coming from domestic groups in real estate and manufacturing, but more than that these cities are driven by local economy on a level that is far greater than say Shanghai or Beijing.
I am not sure if this provides any more insulation or not, but my guess is that as long as the country as a whole is able to keep the lights on, China is not looking at a recession.. it will have some hiccups no doubt, and it could possibly “decouple”, but no recession.
R
http://www.allroadsleadtochina.
March 3rd, 2008 at 1:29 pm
Dear All roads,
China might not slump into recession if her 2nd and 3rd tier cities can carry the carry the boom beyond Beijing. The government has been giving a lot of incentives to companies to develop China’s countryside, and if all works well, the torch will continue to burn bright in China with her 2nd and 3rd tier cities leading the way.
In addition, China will host the Asian Games and World Expo (Shanghai) in 2010, so the boom might just move there?
March 3rd, 2008 at 2:41 pm
Hi Rich;
Personally I feel uneasy about China after the Olympics. Compared with ASEAN, and cities such as Hanoi, Ho Chi Minh, Bangkok, Kuala Lumpur, Jakarta, the even cheaper destinations of Cambodia and Laos, supported by Singapore and Brunei’s money, plus the emerging cities of India - I feel South-East Asia offers more value now, and less risk, than China does. Certainly, a China-only policy has more risk than an ASEAN one. It’s a good bet; if China is OK then fine, but if not, then you’d better have put some of your eggs in another basket to cater for any downturn. At Dezan Shira we are also continuing to invest in 2&3TC in China, but also establish a presence in India, Vietnam and elsewhere as well. If China flourishes, great, if it has a problem, we’re covered, and if both China and ASEAN continue to boom - then thats optimum. Investing in ASEAN is risk spreading and I think thats a sensible approach. China is still too hard to call to make a full commitment too post 2008 - Chris
March 4th, 2008 at 2:27 am
Chris,
Why do you think ASEAN offers less risk and more value than China? I understand from the cost perspective some ASEAN countries might be cheaper, but less risk? Please elaborate.
March 4th, 2008 at 10:12 am
Pffefer, in China you are dealing with one indepndent economy and one government. In ASEAN you are dealing with several independent economies and several governments. If China nosedives, ASEAN doesn’t necessarily have to follow. If you deal in several countries - you’ve spread your risk profile - Chris
March 5th, 2008 at 12:47 am
Hey Chris,
I will agree on one front, the risk profile of China is higher, and speculators should look towards many of those markets instead of China.
Growth figures should come down, and they should have 5 years ago. My main concern is not economic, but infrastructural. Many of the 2nd/ 3rd tier cities are tipping and there are material and energy shortages occurring without that glut of economic stimulus occurring. For me, the downside risk is not the US, but the ability to meet material demands and not suffer another 17 province brownout….
All that said, there are still opportunities in China that make anything in Vietnam look like a poor return. It will require a strong knowledge of the market (something I think more companies have), perhaps a few of us old China hands, and some stones…
On the ASEAN front - which countries do you feel are tied the closest to China. Many, take Indonesia for example, are heavily dependent on raw material sales to China and a downturn will surely have an impact.. Not sure that applies to all? Perhaps some have found ways, like Vietnam, to climb up the latter a but and get above the initial riptide?
R
March 5th, 2008 at 7:25 am
Tied to China ? Indonesia as you say, Japan, Burma, and Bangladesh to a lesser degree. Plus the Central Asian states for oil/gas, but they’re not part of ASEAN.
March 7th, 2008 at 9:48 pm
You can’t argue with the facts. Countries compet for this honor and communities build for the event and after it’s over what to do with those event areas. I hope many will consider putting universities in those evernt areas and taking advantage of stadium facilities. Many event facilities have become landmarks for communities and turned into gardens and tourist destinations. The influx of citizen coming to earn there small amount of the pie selling anything will be what is profit.
March 12th, 2008 at 3:26 pm
Look at this seriously: are people really suggesting that spending and investment related to the Olympics can affect an economy the size of China or the US? This is not Korea or Australia we’re talking about, where the cities involved accounted for a significant proportion of GDP. Beijing is around 3% of Chinese GDP.
I’m not suggesting that there won’t be a slowdown - there may well be - but blaming on the Olympics would be appallingly stupid economics. The ramp up in Chinese growth was only infintessimally linked to the Games, and so will any slowdown.
March 13th, 2008 at 3:10 pm
Hi Duncan, I don’t think anyone is blaming the Olympics for any perceived slow down. However, trends coming together…the Beijing housing market is way over priced, the city is chock full of new bars and restaurants, even some businesses and employees are only here for that. When the circus is over, Beijing will face a hangover. If other factors elsewhere - and in particular the property market, already massively overheated nationally - start to slide as well on market sentiment and lack of sustainability - Beijing after the Olympics may well be the trigger point for a national downturn.