Will Olympics become a watershed in China’s economy?

July 20th, 2008 - 2:39 pm ICT by IANS  

By Lin Jianyang and Xu Xingtang
Beijing, July 20 (Xinhua) Amid falling exports and plummeting share prices, many in China are asking whether the country’s economy would slip into recession after the Olympic Games next month. They cite the examples of many Olympic host countries in the past, which had experienced post-Olympic troughs in their economies. China’s export in the first half stood at $666.6 billion, up 21.9 percent year on year, but 5.7 percentage points lower than last year’s growth.

On the stock market, many investors suffered substantial losses as the market had witnessed a nosedive since late last year. Economic officials and analysts, however, said such a slowdown was widely expected, based on both the economic policies that had been adopted by China and mounting global economic tensions.

“The slowdown falls within expectations of our macro-economic controls. And despite the slowdown, the growth rate is still high,” spokesman of the National Bureau of Statistics (NBS) Li Xiaochao said.

To prevent the economy from becoming overheated was one of the two primary targets set by the Chinese government for 2008, Li said. The other was to guard against galloping inflation.

Zhuang Jian, a Beijing-based senior economist with the Asian Development Bank (ADB), has said macro-economic controls, particularly the tight monetary policy, contributed to the slowdown.

The world’s economy was on a downward track, not only in the US and Europe, but also in Asia, and such a slowdown had hit China’s foreign trade, one of the country’s three major growth locomotives, Zhuang said.

While Zhuang and other analysts also warned of the challenges facing the Chinese economy as the US credit crisis was still far from over, a large number of China’s exporters and other small and medium-sized companies were undergoing hard time, and the soaring prices of energy and raw materials were set to stoke domestic inflation pressures.

The economy has pulled through the severe tests of two great natural disasters in the first half - the unprecedented blizzard this February and the 8.0-magnitude earthquake in May.

But will it succumb to the so-called Post-Olympics Effect (POE)?

The POE refers to the phenomenon that some economies were hit by a post-Olympic economic downturn. It is also called the “Valley Effect” or “V-low Effect”.

The phenomenon was mainly caused by a dramatic investment increase at the pre-Olympic stage, accompanied by a boom in consumption and revenues.

But investment and consumption plunged following the Olympics while the host city would have to shoulder the heavy burden of maintaining idle sports venues.

According to the Bank of China (BOC), which conducted a study of 12 Olympic games spanning 60 years, most economies of the hosts suffered from the POE.

In nine of the 12 Olympics, including the 1988 Seoul and 1992 Barcelona Olympics, the hosts’ annual GDP growth in the eight years following the Games was 0.4 to 2.5 percent lower than during the eight years prior to the events, the BOC study showed.

Then how about the post-Olympics Chinese economy?

According to Li Xiaochao, the BOC spokesman, history showed that a post-Olympics downturn happened mainly in smaller economies, such as South Korea, while large economies such as the United States had not experienced such a downturn.

“The Olympic Games is lending strength to the Chinese economy. But the trend of development will be determined by the fundamentals of the Chinese economy itself,” said Li.

“Currently there are two major sources of pressure for China’s economy, one is inflation and the other employment. We will try our best to find a balancing point between the two sources.”

Andrew Michael Spence, the 2001 Nobel Prize winner for economics, had said that the post-Olympics effect would not have much fallout in the Chinese economy.

“I don’t think that the falling-off will be very big in the Chinese economy case. There are two things to say. One is it’s a big market now, so you can sustain growth on the domestic market.

“Secondly, from the point of the view of the rest of the world, China now is an important source for global growth, so everybody has a common interest or a shared interest in Chinese economic growth,” he told CCTV.

In mid-June at a forum on the Olympic economy, he said that the Chinese economy was set to grow steadily after the Games and a post-Olympic downturn was highly unlikely.

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