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China’s big leap

China is taking the Olympics extremely seriously. The world’s second-biggest economy, with a GDP of over $7trn, measured on a purchasing power parity basis, looks determined to project its prestige and power on the world stage.

Impressive Olympic facilities have been completed with military precision. Big pollution-generating industrial plants have been moved away from Beijing.

Academics have researched and analysed the Olympic phenomenon, focusing on the culture and concept of the games. The authorities are even going to ease internet censorship and ban smoking in the capital during the big event.

The Chinese government promises to turn Beijing into an “ecological city” with green hills, clear water, grass-covered ground and blue skies. This will have a number of consequences, not least the ban on smoking, which is a national pastime. Around 2,000 inspectors will be assigned to enforce the ban and violators will be faced with a fine of about 70p, enough to deter most Beijiners.

The changes are proving to be a boon for some industries. The government’s moves towards cleaner air are not particularly welcomed by tobacco companies but will create selective investment opportunities in the steel industry. Several high-polluting plants in the vicinity of the city have been virtually shut down and tens of thousands of workers and their families relocated.

The move will benefit steel manufacturers in other parts of the country where firms such as Maanshan Iron & Steel in Anhui province have expanded their production.

Other beneficiaries of the Olympics include the travel and hospitality industries. There is one notable exception in the list of usual beneficiaries – advertising, as all the country’s media are state-owned. However, there should be a big spike in advertising rates on internet search engines which will be of particular benefit to Baidu, the leading Chinese brand.

The authorities have promised an impressive display of high-tech wizardry at the games and we expect this to boost revenues of several major South Korean consumer electronics stocks, such as LG and Samsung.

Other beneficiaries will include a number of high-tech stocks listed in China which are mostly unavailable to foreign investors. However, there are limited back doors into this part of the market, such as Vision China, a local producer of LCD screens which is listed on the New York stock exchange.

Airlines operating flights to Beijing, not least Air China, are enjoying a sharp increase in demand for their services, as are hospitality companies. Four big Shangri-La hotels in Beijing are selling “pre-Olympic vacation” packages starting at about £1,500 and offering a focus on different themes, including art, sport, history, dining and shopping.

China is conscious of avoiding any international controversy in the run-up to and during the games. Its leadership has softened the rhetoric directed at Japan, the US and India and is trying to keep a low profile with regard to several projects which have caused uneasiness across Asia in the past.

Beijing seems more careful now in its dealings with partners in North Korea, Sudan and Iran and is trying to avoid public interest in its contracts to supply military equipment and build ports in Pakistan, Burma, Malaysia, Thailand and other countries of the South-east Asia.

If all goes as expected, we do not believe that the 2008 Olympics will cause a significant change in market sentiment.

However, it remains to be seen how China conducts itself once the games are over and whether the experience will bring any lasting changes in its attitude towards other countries in the region. It is clear that China would like to use the Olympics to improve its image on the world stage.

The games might also help China to change its own perception of the rest of the world.

Suresh Sadasivan manages the Old Mutual Asian select fund

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