China Survived The First Half Of 2008... Barely.

The general consensus among Chinese people seems to be that their proud nation has survived an onslaught of calamity during the first half of 2008, and that the Olympics will serve as a welcome turning-point, in many senses.  Chinese people feel embattled but defiant in the face of a slew of recent natural and man-made disasters, in approximate chronological order:

• The American sub-prime mortgage crisis triggers a global credit crunch.
• Debilitating snowstorms paralyze much of China during the Lunar New Year.
• A national pork shortage leads to widespread food price inflation.
• China's new national labor law takes effect, driving costs up dramatically for many low-margin manufacturers.
• Tibetan protests lead to embarrassing riots around the anniversary of the 1959 uprising.
• Olympic torch relay protests in London and Paris, related to the Darfur and Tibet situations, draw international attention. (Most Chinese people remain only dimly aware of these protests, due to media obfuscation).
• Demonstrations protesting Carrefour's rumored support of the “Dalai Lama Clique” are quelled after scuffles involving foreign students.
• A deadly earthquake in Sichuan leads to widely-lauded response from China's central government and military.
• A head-on train collision in coastal Shandong Province kills scores.
• Beijing clamps down on entry visas of all types, citing terrorism and other disruptive threats in the run-up to the Olympic Games.
• Widespread flooding in China's southwest exacerbates the earthquake tragedy and threatens millions.
• Evidence of non-food inflation appears, spurred by energy prices and increasing demand.
• A massive algae infestation at the Qingdao site of the Olympic Sailing venue threatens to derail many events.
• Riots in Guizhou Province over the murky official handling of the suspicious death of a young girl lead to burning of government buildings and sacking of officials.

To cap it all off, with almost Biblical punctuation, officials now warn of a possible locust blight descending on Beijing from Inner Mongolia.

Amid The Maelstrom, Promising Signs.

The Chinese government is not overly concerned about whether foreign tourists will show up at the Beijing Olympics, as long as the Games are peaceful and the medal count  falls in China's favor.  Contrary to expectations, very little doping news has marred preparations for what promises to be the most widely-publicized Games in history.  In fact, expectations for the Olympic Games have been lowered somewhat, which will provide wiggle room for officials as long as a few minor disturbances do not become major problems.

Domestic economic growth remains steady, possibly abating somewhat as the effects of inflation spread.  The Sichuan rebuilding effort will also stimulate the regional economy for at least three years, and will prompt increased military spending in preparation for similar future tragedies.

There is also promising news relating to two of the “Three T's,” as talks with representatives of the Dalai Lama about the Tibet situation appear to be progressing, raising the possibility of a well-timed public relations coup for Beijing.  And direct flights between Taipei and several cities in Mainland China have begun, eliminating a perpetual source of conflict and warming cross-straits ties.

In The Face Of Challenge, China's Outlook Remains Positive.

Despite significant advances in GDP and living standards over the past twenty years, China remains a dog-eat-dog environment with a very long tradition of local corruption, remonstration and periodic chaos – especially in the less-developed interior provinces.  

On the flip-side, patriotism has once again become a steady, unifying force, with widespread and fervent support for the central government in Beijing and for China's system of government – particularly in the wake of the leadership's response to recent challenges – even if peoples' support of local government potentates remains circumspect.

How About The Rest of 2008, And Beyond?

However the Olympics ultimately are judged by foreign media, governments and other observers, the Games have already been an enormous success in the eyes of the Chinese people – a key morale booster and a focus of positive energy for a society that continues to change at an astonishing pace.

Even among people in Shanghai and Guangzhou, who consider Beijing an economic competitor and might be expected to pooh-pooh their northern rival, a strong positive atmosphere surrounding the upcoming Olympics is palpable in local media and Internet forums.

With the positive buzz emanating from Beijing's Bird's Nest Stadium and a widespread feeling of relief at the passing of the first half of 2008, the latter half of the year promises a far more harmonious economic backdrop.

Domestic demand for all sorts of consumer products and services will be strong through the second half of 2008.  The only bogeymen hiding in the dark closet are inflation and rising manufacturing costs.

Export Sector To Feel Significant Pressure.

Export manufacturers, already reeling from Renminbi appreciation of 20% in three years, have seen profit margins further pinched between a slowdown in orders from overseas and more restrictive labor laws (and enforcement) at home.  Large numbers of small-scale garment manufacturers, for example, who typically operate on margins of less than 1.5%, have already gone under.

The export sector of China's economy is in for a rude awakening during the remainder of 2008 and into 2009 as tougher protections for workers and the environment raise the cost of doing business, and as would-be overseas buyers decline to attend trade shows or visit factories due to visa hassles.  

Orders of toys and electronics for the American Christmas season need to be on boats by October, but quality assurance and sourcing agents are having difficulty getting visas to inspect factories and merchandise samples.  This will affect exports well into 2009.

We therefore continue to avoid investing in export-driven industries, preferring entrepreneurial companies in high-growth sectors that are driven by the increasing consumerism of China's expanding middle class.

Where Have All The Tourists Gone?

Visa restrictions have sideswiped China's inbound tourism market, just when many hotels, tour operators and travel agents were hoping to reap a windfall from an Olympic bump in activity that was expected to extend the Summer holiday season.  To the contrary, the streets of Shanghai and Beijing have been devoid of tourists during May and June, and likely will remain so until the second quarter of 2009.

On the other hand, the current visa situation is a boon to sports fans who look forward to visiting Beijing during the Olympic Games.  Sub-50% hotel occupancy rates and a paucity of airline demand is forcing operators to offer sweetheart deals  to those with the temerity to survive the visa application process.