Morgan Stanley: Why China Will Avoid the Post-Olympic Blues

Includes: FXI, GXC, HAO, PGJ
by: Gary Smith

Will China break the traditional pattern of post-Olympic slowdown? That's the question analyzed by Stephen Jen and Luca Bindelli in Morgan Stanley's latest Global Economic Forum. They note that, since the Second World War, GDP growth in the host country of the Summer Olympics has always suffered in the year following the Games.

The striking common feature is an acceleration in GDP growth in the year in which the Olympics were held, followed by a year of sub-par growth. Of the 11 cases we examined since 1956, only the US (Atlanta) in 1996 did not show a slowdown following the Olympics. The slowdown was particularly stark in Australia (1956), Japan (1964), the US (1984) and Korea (1988). Spain actually fell into a recession in 1993. In the two most recent Olympics (Athens and Sydney), both Greece and Australia decelerated by 1.5-2.0% between the year before and that after the Olympics.

One intuitive factor behind this is the investment associated with the lead-up to the Olympics, particularly in non-dwelling and hotel construction, which implies some slowdown after the event. China is clearly no exception, given the resources it is investing to showcase itself for the Games. Furthermore, according to Morgan Stanley's research for the period since 1972, currencies of the host country tend to depreciate following the Games (with only a few exceptions).

However in China's case, Jen and Bindelli find four factors that will mute any such "after-effects" of the Games on the Chinese economy and currency: size, diversity, the U.S. business cycle, and the People's Bank of China.

1) Size: Clearly the post-Game effects should be more city-based rather than countrywide, and given the vastness of China, the contraction in capex is not expected to be as large as the historical average suggests.

2) Diversity: China is quite diverse, and Jen and Bindelli argue that the country could be regarded as having three major areas: East, Central and West. This national diversity provides further protection from any countrywide malaise after the Games.

3) U.S. business cycle: If the U.S. acts out of sync - weakening in the run-up to the Olympics, and accelerating afterward - as Morgan Stanley believes it is, then this will impact favorably on China.

4) The People's Bank of China: More concerned with the U.S. weakness, the PBoC has let the CNY appreciate rapidly of late. However, as Jen and Bindelli argue:

... as soon as Beijing comes to the view that an outright US recession is the more probable scenario, it is likely to slow down the pace of interest rate hikes and currency appreciation. But for now, given that the data coming out of the US remain relatively mixed (i.e., not enough to favour a recession over a mere slowdown), USD/CNY may continue to be guided lower at a rapid pace.

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