China faces slowdown after the race for gold

Government-imposed restrictions on the construction sector and heavy industry have had a negative impact on the economy.

Downside to the 'Bird's Nest': China is likely to experience negative economic growth following the Olympic Games.

BEIJING // China might have struck gold with the Olympic Games, but the world's fastest-growing economy is likely to run out of steam in the next few months. During the build-up to the global sporting spectacular, the Beijing government imposed restrictions on the construction sector and heavy industry in a move to cut down on pollution.

This has placed a "short-term" drag on economic output, according to one of the world's largest investment banks, Goldman Sachs. In a report released over the weekend, Goldman revealed that most of the restrictions put in place centre around Beijing and five other nearby provinces and cities, which generate about 26 per cent of China's economic output. "These measures will likely lead to a visible slowdown in real economic activities, both production and consumption, in August and September," the Goldman Hong Kong-based analysts, Yu Song and Hong Liang, said. "We expect a gradually softening economic path in the second half of 2008."

About 500,000 foreign visitors will attend the Olympics, according to the Beijing statistical bureau and Games organising committee. "While the long-term economic impacts of the Olympic Games are likely to be minimal, it increasingly looks like the Games' short-term economic impacts are likely to be negative," the Goldman report said. The city has spent about US$70 billion (Dh256bn) to improve air quality, build sport stadiums and an airport terminal to prepare for China's debut as an Olympics host. During the past 15 years, rapid economic growth has turned the country into an economic powerhouse, but even China has failed to escape the soaring prices for raw materials and crude oil.

In a report released yesterday, producer prices increased to 10 per cent in the year to July, the first time factory gate inflation in China has been in double digits since the mid-1990s. The jump in the producer price index (PPI), up from June's reading of 8.8 per cent, dwarfed market forecasts of a 9.1 per cent increase and was the highest rate since 1996, according to the National Bureau of Statistics (NBS).

The government did not publish a monthly PPI until 2001. In 1995, factory gate inflation for the whole year was 14.9 per cent. The NBS attributed the lofty reading to high international energy and commodity prices - which are now falling sharply - as well as to increases at home in oil and electricity prices that are administered by the government. Zhang Liqun, a senior researcher at the Development Research Centre, a cabinet think-tank, expressed confidence that price pressures at the wholesale level would not fuel consumer inflation.

"Currently aggregate demand has been growing in a stable manner. The relationship between supply and demand is fairly balanced and competition in the market for finished products is very tough," Mr Zhang said. "So it will be hard for factory-gate inflation, which is being driven up by resource costs, to pass through quickly to consumer prices," he said. July's consumer price index, which has been falling from a 12-year peak of 8.7 per cent scaled in February, will be released today.

This latest economic data and the Goldman report on a slowing economy saw China's benchmark Shanghai Composite Index plunge 5.2 per cent yesterday, closing at 2,470.07, which was down 135.65 points. That was the lowest close in more than a year and a half. The Shenzhen Composite Index of China's smaller, second market plunged 6.6 per cent to 698.37. Analysts said the start of the Olympics last week had quashed any lingering hopes for a rally related to the Games.

"Investors still think the market is weak," said Qian Qimin, a strategist at Shenyin Wanguo Securities. "They are disappointed." * With agencies