The Hindu Business Line : The business of Olympics

The boom witnessed within and outside China in three key areas — Infrastructure, commodities and investments — may pretty much sum up the ‘Olympics Effect’ on growth.

Vidya Bala

As the flame of the Beijing Olympics 2008 was lit by the former Chinese ace gymnast Li Ning, its radiance seemed to reflect the country’s efforts to cast its light far and wide in an attempt to become an emerging Asian super power.

Even as whether China would top the medal chart remains to be seen, the country did well to showcase its strength to the world. But in the run up to the Olympics, it was not the medals tally that occupied investors, but the impact of the event on the global economy and on the commodities market.

Why should the Beijing 2008 Olympics matter as much as it does to the rest of the world? After all, a number of other nations such as Korea or Australia have also hosted and witnessed the economic boom and the Post Olympics Effect.

The difference with this Olympics is that the host country is China. And China, without much dispute, can be termed as an important source of global growth. Therefore almost all nations do have an interest in the Chinese growth.

Spending to impress

The boom witnessed within and outside China in three key areas — Infrastructure, commodities and investments — may pretty much sum up the ‘Olympics Effect’ on growth.

Take, for example, the massive infrastructure building exercise in China. In order to win the bid for the Olympics, China pledged to spend $14 billion on infrastructure (The official figures state that the country has now spent over $40 billion).

To put this in perspective, China’s planned spend was seven times that of the $2 million pledged by Chicago — the US city to contend for the 2016 Olympics. The country’s actual spending, according to Mr Stephen Green, (Asia Economist with Standard Chartered Bank in Shanghai), was 1.5 times the sum spent on the last five Olympic Games put together.

Driving the commodity rally

The massive infrastructure spending resulted in a building boom in China. Beginning with the ‘Bird’s Nest’ stadium to the light-rail connection to the 1,62,000 km of roads, China’s consumption of steel and award of global contracts has been enormous. Reports suggest that China has been consuming 2-3 million tonnes of steel over the last four years for the Olympics preparation alone although this remains an insignificant percentage of the overall consumption.

With China using up over 30 per cent of the world steel production, the demand drivers from China could well have been strong enough to propel prices in metals such as crude steel. Iron ore, copper and aluminium are the other metals that have derived a boost from the infrastructure spending in the country.

On the energy side, China has emerged as a net importer of commodities such as gasoline, diesel and coal. This second largest consumer of energy in the world has traditionally remained a net gasoline exporter, what with domestic giants contributing significant volumes.

However, the country’s import of gasoline and diesel has been on the rise since November 2007. In May this year, China, for the fist time, became a net importer of gasoline. This essentially means that China has not only made less gasoline available to the world but has also been demanding more from the rest of the world.

The country has also become a net importer of thermal coal to tackle the increasing power needs of the country, driven, partly by the preparation for the Olympics. These factors may have, to some extent, contributed to the demand-supply in-equilibrium, resulting in a steep hike in prices of commodities worldwide over the last year-and-a-half.

The Beijing Olympics has not only driven the commodities boom but has also provided a multi-million dollar opportunity to many global companies. For sponsor companies such as General Electric, Kodak or Johnson & Johnson, the Beijing Olympics serves as an opportunity to showcase their products in a marketer’s gold mine. The VISA brand had $10 million being spent by its users on the opening ceremony of the Beijing Olympics!

An Olympics-driven growth?

So, with the Olympics generating so much business, can it be argued that China, as well as the rest of the world, is likely to witness a slump Post-Olympics? Statistics do not suggest this. The annual spending for Olympics infrastructure is said to be only 2 per cent of the total infrastructure spending in China.

And unlike earlier host countries such as Tokyo or Sydney, which are said to have then contributed over 25 per cent to their respective GDPs, Beijing contributes only about 4 per cent to China’s GDP.

Hence, while accelerated spending on Olympics may not happen, China’s addition to its fixed assets may continue to witness growth. That Olympics has not been a great trigger for China’s overall economic growth is also evident from the fact that China has been growing at 10 per cent for over a decade now. Added to this, there was no pre-Olympics acceleration in growth witnessed in the country. On the contrary, the country is already witnessing a slowdown.

According to a statement by Mr Fan Gang, member of the Monetary Policy Committee under the People’s Bank of China, “Our growth rate has dropped, exports decreased and the foreign trade surplus has declined.” He believes that this reduces the possibility of a post-Olympic downturn.

So coming back to square one — what is the significance of Beijing Olympics? The games could well be a watershed for the Chinese economy to move from an export-driven market to a domestic growth driven market – a nation that consumes from the rest of the world. Does the story sound familiar to that of the U.S of A?

More Stories on : Insight | Infrastructure | Sports | Economy | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page