The Olympics: Let's root for China

By Jim Jubak

In the days after the opening ceremony for the Beijing Olympics begins at 8:08 p.m. Aug. 8, I'll be watching the games to root on my favorites (go, Dara Torres!), bask in the improbable, and live and die with the underdogs.

But I'll have one eye on the Chinese Olympic team and its gold-medal total. The number of golds won by the Chinese delegation of 639 athletes, the most sent by any country, could set the direction of the Chinese economy for the next year.

The magic number is 40. That would probably be enough gold medals to give China the biggest haul of any country in the Olympics. And even if it left the country slightly behind the U.S. in golds, it's enough. It would be a 25% gain from the 32 gold medals China scored at the Athens games in 2004. Anything less would be a major disappointment.

Success would put the country in a jubilant mood, and that would give the fiscal conservatives in the Chinese government the support they need to continue fighting inflation, speculation and runaway growth. The countrywide funk that would greet a lesser medal performance would strengthen the factions in government and business that for months have been demanding faster growth and government action to drive stock and real-estate prices higher.

With the global economy balanced so delicately between growth and recession, economic policy in Beijing matters. And so, I'd argue, does China's gold-medal count.

Let me tell you why I believe the short-term course of the Chinese -- and global -- economies hinge on whether China wins 40 gold medals.

A bounce for the Olympic host

After most Olympics, the host country's stock market gets a pretty good bump.

According to data compiled by Ned Davis Research on the summer games of the past 20 years, during the Olympics themselves the host country stock market climbs 2%, beating the return from the Morgan Stanley Capital International World Index by 1 percentage point.

• Talk back: Will China's Olympics success boost the global economy?

It's the performance after the closing ceremony that's eye-catching, though. Six months after the Olympic torch is extinguished, the median gain for the host country stock market has been 20%. The gain after 12 months? 38%.

The reason for this is straightforward, Ned Davis Research argues. After the frenetic activity in getting ready for the Olympics, the host country's economy slows. The heavy spending on new stadiums, roads, airports, athlete housing and the like ends. That reduces the inflationary pressures in the host economy. And as the economy slows from its overheated pace and inflation drops, interest rates fall. And falling interest rates are, all else being equal, good for stocks.

If China's economy follows that pattern, and Ned Davis Research thinks it will, then Chinese stocks, which have fallen about 50% from their peak, will climb after the games.

The trouble is that China faces skyrocketing inflation that began long before workers put the first piece of rebar into wet concrete at the "Bird's Nest," the fitting nickname for the main Olympic stadium in Beijing. The overruns that have pushed the cost of the Beijing games to $38 billion and counting haven't helped domestic inflation. China's consumer prices climbed 7.9% in the first half of 2008 from the first half of 2007, according to the National Bureau of Statistics. That's just a slight decrease from the 8.7% inflation rate recorded in February -- the highest in 12 years.

Trying to tame inflation

Among the factors driving inflation are the soaring costs of oil and other imported raw materials, food prices that are higher around the globe and government policies that pumped a flood of cash into the Chinese economy.

China's money supply climbed 18.1% in May from a year earlier. That additional money -- most of it the result of a decision to keep the Chinese currency, the yuan, at an artificially low level to protect Chinese exports and Chinese jobs -- fueled the boom in Chinese stocks that preceded this year's 50% correction, the boom in Chinese real estate that's only recently started to flag and the almost 8% inflation in the first half of 2008.

This inflation and the speculative fever in the stock and real-estate markets isn't the result of the national government doing nothing. The government has fought inflation more actively than I imagined possible in my May 1, 2007, column, "Why China can't slow down." For example, the central bank raised bank reserve requirements to 17.5% in June. That means a bank has to keep reserves in its vault equal to 17.5% of the money it lends out. That's 17.5% of bank capital that isn't heating up the economy and fueling price and asset inflation. And it's the highest reserve requirement in China's history.

Continued: Olympic Games as a showcase

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