Is China set for a post-Olympic pause? - August 6, 2008
By Peter G. Hall, Vice-President and Chief Economist, Export Development CanadaListen to the Weekly Commentary podcast.
RSS | iTunesWith just a day to go, all eyes are on Beijing as the world anticipates the 29th modern Olympiad. Excitement over these Games has steadily built, and meticulous preparations mark a thrilling coming of age for the Chinese economy. Billions have been spent on the event, prompting some to predict a post-party recoil. Are these just party poopers, or does the view have some merit?
Investment spending has played a huge role in China’s economic renaissance. In the past 12 years, investment has kept pace with the economy’s torrid 9.5% average annual growth rate. But during the years of Olympic preparation, annual investment growth rose to 12%, outdoing the overall economy by 2% each year. Yet the ramp-up was not unique to China; BRIC-members Russia and India, ignited by a strong global economy, also saw a similar investment pattern.
Still, China has a unique dependence on investment. For most economies, whether developed or developing, investment accounts for between 15% and 25% of total spending. For China, the share is a whopping 40%. Put that together with the recent growth pace, and investment is generating close to half the growth in the overall economy, well ahead of most of China’s emerging market peers and dwarfing the impact of investment on the world’s largest economies.
In this light, does the cessation of Olympic investment spell trouble? Analysis shows that host countries typically see growth slow following the games. Official estimates peg total Chinese Olympic spending at US $43.13 billion, a hefty tab, and likely understates total impact. It sounds like a lot to lose once it’s done, but two facts put it in context. First, funds weren’t just spent in the past year; spending began in 2001, dulling the single-year impact. Second, even if all the spending were carried out in a single year, it would still add up to just 3.7% of total investment. Sheer size has put China into a rare club of top economies that can host an expensive event.
In contrast, the same price tag would have swamped recent host countries. China’s spending amounts to 20% of investment in Australia, and a colossal 61% of investment in Greece, which is still struggling to pay off its US $15 billion Olympic bill. Future candidate Brazil would be hard pressed to match China’s effort, as it would account for 24% of current Brazilian investment. All other large emerging markets would face a similar challenge, and the costs would be significant for most other economies. For them, the end of Olympic spending would be quite noticeable in the broader economy. But for China, the numbers don’t add up to post-Olympic economic fallout.
Even so, the doomsayers may have an out. The slowing global economy caught up to China in the April-June period, as year-to-year growth eased rapidly from 11.9% to just 10.1%. Exports were the main culprit, and investment may not be far behind. In a fast-paced economy, investment often exceeds actual needs, and can correct sharply in a downturn. Though weaker investment would likely be blamed on the Olympics, it is more about the timing of world growth.
The bottom line? By all appearances, Beijing will be a long-remembered Games, and will probably set the standard for Olympic events for a generation. Unfortunate timing may tarnish China’s gold-medal performance, making the aftermath look like a standard post-Olympic pause.
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