Jim Jubak

Jubak's Journal3/18/2008 12:01 AM ET

China's looming Olympics disaster

The Beijing games are supposed to showcase China's stature on the world stage. But they're producing protests at home and may shut down big hunks of the nation's economy.

By Jim Jubak

On March 10, Haile Gebrselassie, the world record holder in the marathon, ruled out competing in the race at August's Beijing Olympics. The city's notoriously bad air pollution posed a threat to his health over the 26.2-mile course, the Ethiopian runner said.

It says a lot about the disaster that's unfolding for the Beijing games that the withdrawal of an Olympic favorite caused hardly a ripple. And why should it when bigger stories are brewing? It's possible that:

  • A forced shutdown of Beijing's factories and power plants during the games will throw China into an economic downturn.

  • Diversion of safe food to the Olympic Village will cause food riots elsewhere in China.

  • The transfer of 80 billion gallons of water -- equal to the annual water consumption of Tucson, Ariz., a city of 535,000 -- from Shaanxi and other provinces in northwestern China will shut down factories and agriculture in the region.

Yes, the Beijing Olympics, which were supposed to showcase China to the world, are still likely to provide exactly the kind of prestige-building extravaganza that the country's leaders had hoped for. But domestically, the games are quickly turning into an economic and political disaster. Once upon a time -- maybe six months ago -- investors (including yours truly) looked on the Olympics as a guarantee that China's stock market and economy would keep chugging along through the summer. "Safe until August" was the mantra.

Now, it increasingly looks like the games themselves could be the catalyst for a significant downturn in China's stock market and economy.

Steps haven't been enough

Observers already knew that China was serious about cutting air pollution in Beijing and that, if necessary, the government would shut down factories and power plants. Pollution had been one of the reasons China lost its 1993 bid to host the 2000 Olympics, and this time around, the country promised the International Olympic Committee that it would clean up Beijing's act before the games.

Officials converted coal-fired furnaces to natural gas. Factories have been relocated to the suburbs. Millions of trees have been planted to break the winds that blow dust in from the plains north and west of the city. Older taxis have been replaced with 80,000 newer models that produce less pollution. Heavy trucks are permitted to enter the city only at night. The city expanded its subway system and built a rail line to connect the airport to downtown.

And it still hasn't been enough. Thanks to China's rapid economic growth and Beijing's own stunning growth -- the local economy is up 144% since 2000 -- car ownership has soared. The city has 3 million vehicles and is adding 400,000 cars and trucks a year. Power plants burn cleaner, low-sulfur coal, but they burn a lot more of it: 30 million tons in 2007. A building boom has added 1.7 billion square feet of construction since 2002, contributing to the city's problem with dust. Daily concentrations of particulates in Beijing equal those in New York, Los Angeles, Washington, Chicago and Atlanta combined.

Desperate for solutions

The only way for the government to deliver anything close to the air-pollution targets it has promised is to enforce a Draconian short-term fix: Shut down the sources of pollution for the duration of the games. Some coal-fired power plants, cement factories, steel-making plants and chemical plants in Beijing, Tianjin and four neighboring provinces will be shut for 30 days before the Olympics begin Aug. 8. Ten major polluters have already been shut, according to the State Environmental Protection Administration.

Some factories that remain open will not operate at full capacity. For example, Shougang, this year China's second-largest producer of construction-grade steel, will cut production in half, to 4 million metric tons.

Video on MSN Money

Price of oil © Kevin Phillips/Digital Vision/AGE Fotostock
Oil shows inflation fears
The headlines screamed when short-term oil futures hit $110 a barrel. But the price of oil for future delivery -- as far out as 2016 -- has topped $100 as well. That's a clear sign, MSN Money's Jim Jubak says, that the oil market expects inflation to be an issue for a long time.

Water pollution is, in some ways, easier to fix. Just pump in enough clean water from surrounding areas to meet the needs of the 16,000 athletes and officials who will arrive in Beijing for the games (and to make the city look lush and green for an international TV audience).

One tiny problem: The city and surrounding region aren't exactly swimming in water. Beijing sits at the edge of the water-poor northern China plain, more than 90 miles from the sea and distant from any of China's major rivers. To make up for the deficit in surface water, Beijing has relied on wells, but the city has pumped water out faster than it is replaced from natural sources. The groundwater level under the city has fallen 75 feet in the past 50 years.

Farms without water

To get water for Beijing, surrounding provinces have been ordered to ship the cleanest water to the capital. In some farm areas, that means no water from local reservoirs and limited irrigation supply from local wells. Farmers in some areas have been ordered to grow only corn, which takes less water but fetches a lower market price than rice or vegetables. Compensation to poor farmers required to ship water to the richer city: about $30. And even that isn't paid to everyone.

No wonder local officials have been screaming. An Qiyuan, a member of the Chinese People's Political Consultative Committee for Shaanxi and former Communist party chief for Shaanxi, went public in the foreign press with a demand for compensation. "We still need to live," he told the Financial Times, "so I say the government needs to compensate Shaanxi. If you don't compensate the masses, then how can they survive?"

Continued: Ham-handed public policy

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