Beijing is China’s host city for the Olympics, for the second time this century as the International Olympic Committee previously awarded the city the 2008 summer Olympics, in addition to this year’s 2022 winter Olympics. Being a host city is a symbolic honor, but it also comes with direct economic impact as well (read about Rio’s experience). China is no exception, and as an emerging market and two-time host, it is an interesting case study to explore.
Training for Olympic competition requires a carefully considered, deliberate, and sustained strategic effort in pursuit of a long-term goal, likely under the tutelage of an experienced expert or set of experts. Indeed, this structured, heavily planned approach has many clear parallels to China’s growth since the last time it hosted the games, and it may shed light on where the country might find itself after the passing of another decade and a half or so.
2008: Summer Olympics, Market Reform, Global Financial Crisis
At the time of the 2008 Summer Games, China had seen several years of strong growth following its ascendance to the World Trade Organization (WTO) in 2001. Having benefited greatly from its market-oriented reforms, the country earned the nickname as ’factory of the world’.
As the Global Financial Crisis took hold in the same year, China was positioned to provide a stimulus package of roughly 15% of GDP, boosting growth and making a run at becoming the new economic engine of the world, all while the US focused on repairing its balance sheet in the following years. This set China on course for a massive splurge on property and infrastructure, and they were said to have used more concrete in three years than the US did in the entire 20th century.
Conveniently, infrastructure was also part of the $42 billion cost of hosting the 2008 Olympics, with projects including a $3 billion airport terminal, $500 million stadium, and $30 million city ‘facelift’. The cost was viewed as a part of the overall long-term investment push as Beijing was both overdue for infrastructure projects and making a name for itself on a global perspective. At the same time, the country continued its relentless and methodical climb up the value chain, slowly evolving from a factory to an innovative nation and top patent producer.
2009 – 2019: The Interlude, Debt, Policy Changes
In 2013 President Xi Jinping took office and implemented a sweeping anti-corruption drive. This campaign conveniently yielded the upshot of a power consolidation that was one of the most important political developments in modern Chinese history.
Since then, the country has slowly transitioned toward more centralization, heavier reliance on industrial policy, and increased state control over society. Comparatively, China’s growth since 2009 relied heavily on debt creation, and in 2015-2016, China again enacted a large debt-fueled stimulus to boost its economy.
Around this same time, and as the inevitable result of the one-child policy enacted in 1979, China’s working-age population began to shrink. This has proved to be a watershed moment. China’s now shrinking working-age population forced a policy shift away from a mindset of growth-at-any-cost toward a mindset of sustainable, inclusive growth, less systemic financial risks, and less environmental degradation.
In our view, China seems to have been traumatized by what they saw in the US during the financial crisis; and has since realized that with each successive stimulus package, they were piling on debt, building excess and unprofitable industrial capacity, and marching toward a destabilizing crisis of their own – all without the democratic accountability to endure such hardship.
The Early 2020’s: More Olympic Games, Global Pandemic, Political Tension
Perhaps nowhere is this new mindset more clearly demonstrated than in China’s muted policy response to the current pandemic. It’s apparent the Chinese learned they overdid it with debt and stimulus in previous economic downturns, while most of the Western world seems to have drawn the opposite conclusion (i.e., that they should have done more).
Unlike China, a majority of the developed world opened the fiscal and monetary floodgates (and is now dealing with the inflationary consequences of those actions). Over the past two years, China already tightened its economic policy stance, cracked down on tech companies, and restricted reckless behavior in the property sector by limiting developers’ access to finance. More recently, it has actually started to loosen policy as the rest of the world only now begins their tightening cycles.
While Beijing repeated as an Olympic host city in 2022, the optimism and outlook from 2008 did not. Sure, China’s economy is three times the size it was for those summer games, but pandemic fallout, human rights concerns, and an already established Olympic infrastructure have made for a less significant symbolic event. The budget this time around was also just $1.9 billion, an enormously more economical approach.
While China’s changing demographics define its internal approach to economic policy, the other major change that will define China’s development in the coming years is its relationship with the outside world. In recent years, the US has taken a more adversarial posture with China as the latter continues increasing its technological and military capabilities. There is now strong bipartisan support for the decoupling of American and Chinese supply chains as it is increasingly viewed as a mistake to have outsourced American production to a now strategic adversary. The coming years will be defined by the competition for technology and military supremacy, in an increasingly unstable and multipolar world.
What does the future hold?
In the next decade, China will need to balance its changing role in the world with its changing priorities at home. For example, as an increasingly advanced and wealthy economy, will the Chinese people eventually demand the freedoms that usually come with greater wealth? China has long been lauded by some of the world’s foremost geopolitical experts for its rather unique capacity for long-term strategic planning in the pursuit of its national goals, unencumbered by the distractions and constraints of short-term election cycles. Understanding their goals and strategies will help us to predict if China will be on the winner’s podium of economic superpower countries years down the road, helping us identify investment opportunities along the way.
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Source: Wall Street Journal
This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. The reader should not assume that investments in the securities identified and discussed were or will be profitable.