Can China Avoid a Post-Olympic Economic Downturn?

Economics analysis indicates that countries that host the Olympic Games typically suffer from economic decline and currency depreciation in the months following its conclusion. The "so-called ‘Valley Effect’ is mainly caused by a dramatic increase in investment in the pre-Olympics stage, accompanied by a boom in consumption and revenues, [but] investment and consumption shrink in the post-Olympic stage." On the surface, China fits this mould, as it spent upwards of $40 Billion building venues and upgrading infrastructure in preparation for the Games. At the same time, most economists agreed that the Chinese economy was both more robust and more diverse than previous hosts, and could even receive an economic boost from the Games, as a result of increased media exposure and tourism.

The first bump in the road came in the form of a tainted products scandels, which led to the recall of dozens of items, including toys, medicines, and most recently, dairy products. Then came the credit crisis, which exploded in the US and quickly spread to the rest of the world. While the implications for China are not entirely clear (for reasons that will be discussed below), it seems almost certain that the economy will take a hit. In which case, it probably won’t be possible to disentangle the (negative) economic impact associated with the Olympics from the general economic downturn, but I don’t imagine this is of much concern to investors, anyway. Given the rising prominence of China within the framework of the global ecomony analysts are watching with baited breath to see if and how China can avoid a dreaded economic downturn.