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International Financial News & Geopolitical Report

Weekly Commentary on the International Political Economy

July 14, 2008

China's hopes
China originally bid for the 2000 Olympic Games but lost the bid to Australia. The Chinese failed to secure the 2000 games, in part, because of the violent Tiananmen Square crackdown in June 1989. When China was looking to host the 2008 games, Chinese officials claimed that getting the bid would help in the development of human rights in China. The International Olympic Committee (IOC) was wary of such claims, and Francois Carrard, the director general of the IOC, at the time of China's victory in 2001, said "We are taking a bet that seven years from now...we shall see many changes."

To a great extent, events link the Olympics play into China's strengths. Because of the country's command-and-control economy and political system, it is more able to centralize and mobilize resources in a concentrated fashion to meet specific goals. Thus, building venues, organizing mass changes in transportation patterns, and forcing temporary changes in industrial utilization and work habits are all easier in an authoritarian society compared with a democratic one. China has a long history of such projects -- the Great Wall, the Grand Canal and the Three Gorges Dam are all examples of China mobilizing massive resources to accomplish a specific goal.

China has invested at least $40 bn in new construction for the games. In order to reduce endemic pollution, it has forced the reduction of driving in the capitol and has recently ordered industrial firms in the five surrounding provinces to reduce production to cut smog. News of an algae bloom in what will be the sailing course has led to a massive human effort to collect the algae. Citizens, using everything from commercial vessels to small pleasure boats have been employed to pluck the slimy green algae out of the water to be shipped inland for pig fodder. The Chinese government has embarked on a program to teach cab drivers, hotel workers and others basic English and Western etiquette (queuing in lines, avoiding public spitting, littering, etc.)

Unfortunately for China, the increased exposure has also highlighted areas in which China does not excel -- human rights, environmental protection and tolerance of dissent. These issues threaten to turn China's emergence on the world stage into a major embarrassment.

China's fears
China faces a number of problems that the increased focus of the Olympics will bring.

• Environmental problems: China's pollution problems are endemic. We discussed their impact at length in our September 4, 2007 report titled "China's Pollution Problem." In that report, we examined how China's breakneck development has fostered widespread environmental degradation. In response to these concerns, China has promised to deliver a "green Olympics" and has spent $16 bn on energy and water conservation projects. In addition, as mentioned above, it has been restricting industrial and construction activity in Beijing and surrounding areas for the past several months. Still, pollution levels remain well above accepted norms. In response, the IOC has warned that endurance sports, such as the marathon and long-distance cycling, may be canceled. Haile Gebrselassie, the world's fastest marathoner, has already withdrawn from the games because of fears that participating could cause permanent health damage. Other teams, including the United States and Australia, have announced they will bring most of their own food and water. If an environmental or food safety incident prevents some athletes from participating, it would be a significant public relations problem for the Chinese government.
• Organized domestic political protests: China's Communist Party maintains a tight grip on Chinese society. There is little tolerance of public dissent; in addition, internal security agencies keep a close watch on organized groups. The Communist Party fears any organized group and has cracked down on religious groups, including the Roman Catholic Church and the Falun Gong; academic groups; "unauthorized" labor unions; and even direct sales organizations. As the games approach, we can expect increased scrutiny of these groups; if crackdowns come to the attention of the international media, it could embarrass the regime.
• Individual political protests: Although the internal security apparatus is quite effective in controlling organized groups, it is virtually impossible to control the "lone wolf" protestor. An individual may decide to protest for any number of reasons: They may be upset with their local government, or wish to worship as they choose or simply be deranged. If a person decides to follow the age-old Far Eastern protest, self immolation, and commits public suicide in Tiananmen Square in front of the international media, it could create an incident. In response to these fears, the Chinese government is backtracking on earlier promises to allow Western media the right to make live broadcasts from the games or specific venues, such as Tiananmen Square.
• International activists: Various groups have been critical of the Chinese government's international activities. As China has developed, its need for commodities has increased dramatically. Finding that access to foreign oil fields, mines and other commodity-producing areas in relatively safe regions have either already been claimed by the developed nations or denied by nationalistic resource policies, China has been forced to invest in areas of the world that are unstable. Sudan is a prime example. China has prevented the United Nations from applying significant sanctions on Sudan via its veto on the United Nations Security Council. International activists, some of them high-profile, have severely criticized China's behavior and have dubbed the 2008 games the "Genocide Olympics" because of the behavior of the Sudanese government in Darfur. The recent crackdown in Tibet has also inflamed similar concerns. Until Stephen Spielberg resigned as the artistic coordinator for the opening ceremonies, some activists were calling him the "Leni Riefenstahl of the Beijing Games" after Hitler's favorite film director. China is trying to maintain its sovereignty by not reacting to these protests and yet also trying to diffuse them by meeting with various groups, such as Tibetan leaders. At the same time, party officials have played the "nationalist card" to encourage citizens to see international human rights as simply a Western ploy to hamper China's development. This has been seen during the Olympic Torch run, where Chinese citizens living abroad carried out counter protests.
• The jihadist threat: China has indigenous Muslim groups in the western Chinese province of Xinjiang. Occasionally, this Uighur movement holds protests and has been blamed for bombings and other terrorist acts. Although considered a separatist movement, it is highly fractured, a testament to China's interior security. These groups have the potential to carry out terrorist acts at the games, however, odds are the security services will uncover the plot well before it can come to fruition.

China's response
China, facing these threats, has responded in a rather "ham fisted" manner. It has jailed a number of domestic activists, held a massive crackdown in Tibet and has been steadily interfering with Western media as it prepares to cover the games. Despite all of these steps, it is still very possible that the Communist Party will not be able to prevent protests or other unexpected events from occurring.

For an authoritarian government such as China's, the inability to control events is a major problem. In effect, the tradeoff an authoritarian government offers its citizens is stability in lieu of freedom. A democratic society accepts that a certain degree of uncertainty comes with increased freedom; for example, the second amendment of the U.S. Constitution can increase the risk that a simple disagreement can turn into a confrontation with guns. Authoritarian governments curtail freedom; in return, the government offers to protect them from the whims of societal change.

Events such as the Olympics increase the odds of unexpected incidents. Because the Olympics are a global public event, anyone unhappy with anything can use the games as a way to express their causes. The 1996 Olympics in Atlanta became the venue for Eric Rudolph to protest abortion by exploding a pipe bomb in the Centennial Olympic Park. Protests of other sorts are common at these games. It is important to remember that a decade after the 1936 Olympics in Berlin, the 1980 games in Moscow and the 1988 games in Seoul, all of these authoritarian governments fell from power. The Chinese Communist Party is probably aware of this historical pattern and will try not to become the fourth member of this list.

Ramifications
Although we don't expect an immediate change in the Chinese government after the Olympics, the chance of a major protest or terrorist event cannot be eliminated. The Chinese government surely wants a well-run event that will highlight the tremendous strides China has made in its development. And for the most part, this will probably be the outcome.

However, if there is an ugly event, China will likely react in a xenophobic manner. The Communist Party tends to react to such things by fanning nationalist fervor, and once started, it may become difficult to control the outcome. A major disruption would be considered a bearish event for commodities as it could weaken demand for such goods. Developed economy equities could benefit from a major disruption as assets would likely exit emerging markets. Thus, an ugly event would be considered a bearish situation for emerging markets.

Our expectation is that, after the games, China will ramp up industrial and construction activities curtailed to contain pollution. Thus, by the end of the year, commodity demand could rise and give that market a lift. We do expect weaker commodity prices into late fourth quarter because of slowing global demand.

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