China's Economic Torch Won't Outlast Olympics

Growth will cool after the Beijing Games as slowing global demand and rising costs at home hurt exports and profits

China spent some $43 billion and the better part of a decade preparing for the Beijing Olympics. But now, like a party host surveying the house as the revelry winds down, it is contemplating what will happen when the Games end on Aug. 24. Toymaker Shanghai Haixin, for instance, has sold millions of Fuwa, cuddly plush toy versions of the five mascots for the Games. "It's pretty unlikely that people will buy these things after the Olympics," says Shanghai Haixin executive Shan Yingkun. "Orders will be few and far between."

But the demise of the Fuwa is far from Shan's only worry. Like companies across China, Shanghai Haixin is grappling with rising labor costs, high fuel prices, and the strengthening Chinese currency. Indeed, while the country may heave a collective sigh of relief after the Games, "China's economic and financial-market challenges have little to do with the Olympics and more to do with slowing global demand, rising input costs, and domestic imbalances," says Jing Ulrich, chairman of China Equities at JPMorgan Securities (JPM).

That's not to say the Chinese economy is in danger of a hard landing. Gross domestic product growth this year will fall to 9.9% from 11.9% in 2007, Standard Chartered Bank predicts. Next year, growth is expected to cool to 8.6%—slow for China, but a miracle in most countries. And despite the billions plowed into infrastructure for the Games, the investment represents less than 1% of China's nationwide spending on bridges, roads, and factories last year. So the "Olympics effect"—where a host country's economy slows following the binge of construction for the Games—is unlikely in China. That's a good thing, since growth in the mainland is one of the few bright spots for the world economy.

Still, global problems are starting to weigh on China. Exports expanded by 22% in the first half, down from 28% in the same period of 2007 (though they were up a surprising 27% in July). Corporate profits grew by 21% in the first five months of this year, half the rate of the same period of 2007. The Shanghai stock market is down 60% since October. And one-third of the office space in Beijing's central business district is vacant, according to real estate consultant Jones Lang LaSalle (JLL).

The U.S. slowdown is a big part of the problem. China's $80 billion furniture industry, for instance, got a boost from the Games, selling chairs, beds, and tables for the Olympic Village and hundreds of new hotels. But that business was tiny compared with lost orders from the U.S., which typically buys about 40% of the country's $23 billion in furniture exports. "Because of the subprime lending crisis in the U.S., American merchants are reducing their orders or not paying on time," says Zhu Changling, vice-president of the China National Furniture Assn., a trade group.

So once the athletes pack up and go home, China's leadership will surely step up measures aimed at keeping the economy expanding fast. Already on Aug. 1, Beijing trimmed export taxes imposed on garment manufacturers, and the central bank has eased limits on lending by banks to boost investment. And while inflation was a worry earlier this year, peaking at 8.7% in February, consumer prices grew by a relatively modest 6.3% in July. With prices coming under control, Beijing is likely to step up government spending again to kick-start growth, says Huang Yiping, chief Asia economist at Citigroup. "They are more worried," he says, "about growth than inflation."

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