Many investors are concerned that following the investment boom in the run-up to the summer Olympics, the Chinese economy could run into recession as it is likely economic output will fall and industrial production may shrink. As a result, it could trigger a large correction in the equity market.

However, according to the International Olympic Committee bid document in 2000, the official infrastructure spending for the Olympic Games in China was estimated at $14.3 billion. Even if the cost was tripled at $45 billion due to higher commodity price, it is less than 2 percent of China's nominal GDP of $3.4 trillion. In fact, such spending on infrastructure is probably necessary for China even if the country hadn't hosted the Games.

The extra spending will also increase the country's productivity as well as global competitiveness. Hence it would be good for China in the long run. Furthermore, Beijing represents only 1.1 percent of China's population and less than 3 percent of its GDP.

The Republic of Korea, Spain or even Australia, which had hosted the Olympic Games, had smaller economies at the times of the Games compared with China and hence the Olympics had a much bigger impact on these countries in terms of investment swings.

We suppose we will see similar capital expenditure contraction trend in China but any correction would be based on other factors rather than the Olympics.

We believe both inflation and a possible US recession are more likely to cause this slowdown. As inflation remains stubbornly high, the central bank will maintain its tightening control over the economy.

But, until we see solid data coming from the US indicating an outright recession, we are unlikely to see any change from the central bank to slow down the bank reserve ratio hikes and currency appreciation.

However, we are positive about both the market and economic front in China.

Firstly, the A-share market so far has corrected more than 50 percent from its peak, and the price is now back to the end of 2006-level. Many speculators have already left the market as hopes of government intervention are diminishing.

Secondly, the expected price-to-earning (PE) ratio has come down significantly to the level which was last seen in 2005 when the Chinese stock market was the worst performing emerging market of the year on the back of a single-digit economic growth.

Thirdly, with the average expected earning from the Shanghai A-share being more than 20 percent and the expected yuan appreciation more than 10 percent, the current PE is relatively low.

On the economic front, we believe China is unlikely to slow down significantly in capital spending.

First, China has more than $1.6 trillion in foreign reserve. Even under the current lack of liquidity in the global market, China still has the spending power to support its economic growth.

Secondly, the WTO suggested that China should continue to pursue productivity in its recent Trade Policy Review. In order to increase productivity, technology advancement needs to be in place, hence capital spending will be increased in order to achieve it.

If the Chinese government follows this trail, which we believe it will, economic growth is unlikely to be slow after the Beijing Olympic Games.

The author is director of Convoy Asset Management Ltd.

(HK Edition 07/15/2008 page3)