Tourism and spending are up but production has slowed to cut pollution so the Olympic dividend is largely psychological, reports Clifford Coonan

AT BEIJING'S Silk Alley market, home to all manner of counterfeit and genuine watches, clothing and jewellery, it's very easy to see the short-term economic impact of the Beijing Olympics in action. There are no cash registers but the boxes full of red hundred-yuan notes are stuffed to burst.

The sales staff, mostly young girls from the provinces, are chosen for their ability to lure the visiting tourist and haggle tough, and they are busily relieving the Olympic tourists of their yuan. Even though the general rule of thumb is to pay one sixth of the price originally quoted, most settle for half. That's generally an enormous mark-up considering these are all domestically produced goods from the factory belts of southern China.

Downstairs in the Beijing branch of the O'Brien's sandwich shop chain, there are queues of Olympic T-shirted customers lining up for a bite, deposited by Beijing 2008 coaches on a shopping and sightseeing tour.

The good fortune of the merchants of Silk Alley is clear anecdotal evidence of an Olympic-fuelled boom but, more broadly, assessing the economic impact of the Beijing Olympics is a challenge. The Olympic dividend looks set to be largely psychological.

Compared with Spain, where the Barcelona Games in 1992 gave a big boost to the local economy, China's rising economic power renders the Olympic factor quite small and, combined with the infrastructural investment, it is probably not going to make a major difference in strictly numerical terms.

The games in Beijing are similar to those in Barcelona and Seoul in 1988 because of the large investment in infrastructure and urban redevelopment associated with the games.

Both Los Angeles in 1984 and Atlanta in 1996 were relatively low-investment, commercially-run games, which left a small footprint on the two cities. Sydney hosted a great Olympics in 2000, but the long-term economic effect has not been dramatic and some of the stadiums are underutilised.

Even during the month before the Olympics, Chinese people shopped frenetically. Retail sales expanded at the fastest pace in at least nine years in July as incomes and prices climbed in the world's fastest-growing major economy. Sales rose 23.3 per cent to 862.9 billion yuan (€83.5 billion) after gaining 23 per cent in June, the statistics bureau said this week.

But hosting the Olympics has raised China's global profile, and the country as a whole should benefit in the long run, Moody's economist Sherman Chan said this week.

China spent more on the games than the previous five hosts put together, but the Chinese organisers were lucky because the private sector picked up a significant chunk of the €28 billion invested directly or indirectly in the games, meaning it will not be a fiscal burden on the government.

"Better airport facilities, subway networks, roads and recreational venues will all help to support continued rapid development," said Chan.

A Goldman Sachs report expects a slowdown this month and next during the Olympics and Paralympics because of the drag on economic activity as a result of restrictions on construction, factories, cars and mining to cut pollution. It said the slowdown is likely to be short-term and is fairly abrupt when it comes to the positive sentiment boost the Games might provide.

"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.

Most of the restrictions have been imposed in Beijing and five nearby provinces and cities, which account for about 26 per cent of China's economic output.

Beijing's economic importance in China is relatively minimal in the overall national context. It has just 1.1 per cent of the population and economic output is less than 3 per cent of GDP.

Economic growth has slowed for the past four quarters but not by much. If anything the slowdown has eased overheating fears. Even at 10.1 per cent in the second quarter, Chinese GDP growth was the fastest of the world's major economies. With the government targeting 10 million new jobs a year, Credit Suisse wrote recently, GDP expansion of below 9 per cent is unacceptable.

Look at car sales. Growth in passenger vehicle sales slowed to 28 per cent in July from 33 per cent in June. It's still a strong market for cars and that is propping up the balance sheet of many foreign carmakers.

But there are areas where China's economy could do with a post-games fillip. Trading volumes are well down on the stock market, having fallen off anyway in recent weeks because of the Olympics and the traditionally slow August.

The benchmark Shanghai Composite Index is down more than 53 per cent this year, making mainland China's stock market among this year's worst performers worldwide after record bull runs in 2006 and 2007.

However, the stock market is still not a major factor in overall economic growth in China - the economy is too large and the number of shares in issue too small.

Other headaches for the economy post-games are concerns about the strength of the yuan. Also, there are fears of a property market slump as real estate prices follow the property market downwards, and there have been sharp falls in Shanghai, Guangzhou and Shenzhen. However, many cities in China have been largely untouched by the property boom, and mortgage lending remains a small part of bank business, so this factor can probably also be discounted.

Inflation is running well above the pain threshold outlined by the government, posing a threat to both corporate profits. Consumer prices rose 6.3 per cent last month from a year earlier, down significantly from June's 7.1 per cent, but producer prices rose 10 per cent.

Of course the economic dimension of the Olympic Games does not solely relate to the billions of yuan being spent on the games and the infrastructural developments.

"Hosting of the Olympics Games by China will not bring a boost to the country's economy as a large power, whether in terms of direct investment or indirect promotion, but it will prove to be a milestone of the country's economic growth and development," Yi Xianrong, a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences, wrote in a commentary on Sohu.com.

"The recent 10 years has been called the 'golden decade' of economic growth for China, as well as the decade when China integrated itself into the world economy. In this sense, the Olympics can also be seen as an indication of China's economic growth," said Yi.

The fact that four billion people around the world are watching the event on television will do an awful lot to put Beijing on the map. The event will generate a longer-term feel-good factor that can translate into a positive economic impact.

China's image will be enhanced and more people will be aware of the country as a place to do business. This will bring in tourists - research by Visa International shows that nine out of 10 visitors to the games are also going to explore other parts of China.

The Olympic dividend may be a longer-term scenario but it is an important one the Chinese government is happy to reap.