Everyone knows what happened to China’s economy after WTO, but what about ATO?

China’s accession to the World Trade Organization in late 2001 was one of the factors that touched off six years of double-digit growth in China, culminating in an incredible 11.4 percent expansion of the country’s GDP in 2007. Exports quadrupled from approximately $300 billion in 2001 to $1.2 trillion last year. Property prices climbed ever higher, and China’s stock market soared, with the Shanghai Index passing 6,000 last October. In early November, PetroChina listed in Shanghai and became the first company in the world to be worth $1 trillion. With stock market valuations at inflated levels, China boasted eight of the 25 most valuable companies in the world. If that wasn’t a bubble, I don’t know what is.

As the pages on the calendar turned at the end of 2007, conventional wisdom held that China had so much face invested in the Olympics that the government would do all that it could to maintain a fast growth rate in 2008, and that an expected high level of spending in the run-up to the Games in August would ensure that result. Coming on the heels of six years of double-digit growth, it was quite natural to wonder how big the emotional and economic letdown would be when the last of the athletes and tourists left Beijing.

Although China’s economy grew by 10.4 percent in the first half of 2008, this represented a marked slowdown from the pace set in 2007. By almost every measure, China’s economy has been decelerating since the beginning of the year. For example, export growth slowed to 21 percent in the first half of the year, compared with 26 percent in the same period last year. Vehicle production increased by 17 percent for the first six months, but the growth rate was over 20 percent at the beginning of the year and has been declining nearly every month since. By June 30, there were widespread reports of higher than normal passenger car inventories.

The economy has continued to deteriorate since mid-year. The latest official statistics on manufacturing show that output of Chinese factories may have actually contracted in July. By early August, Jing Ulrich, Hong Kong-based chairman of China Equities with JP Morgan, was quoted as saying: “As the day of the long-awaited opening ceremony arrives, China’s economy is indeed slowing. A slowdown in export growth is rippling across the economy. New orders at factories have declined, and the country’s property market has seen a sharp drop in transaction volumes.” Against this economic backdrop, it’s no wonder that the Shanghai Index has plunged by more than 60 percent to below 2,400.

What happened, and what does this mean for China ATO? A global slowdown has been one reason for China’s slowing economy, particularly with respect to exports, but measures taken by the Chinese government are certainly another. Concerned about inflation, high commodity prices and an overheated economy, China began restricting bank loans and allowing the renminbi to appreciate more rapidly against the dollar last year. Apart from these broader measures though, it appears that the government also took advantage of strong overall growth in the economy to pass measures which are having the effect of forcing China’s manufacturers up the value added chain. A new labor law, stricter enforcement of environmental laws and reductions in export rebates may be seen as an attempt by the government to discourage the growth of companies that produce low-margin products that rely on low-cost labor, pollute the environment and abuse workers. Reports of rampant factory closures in the south of China suggest that these measures are having precisely this effect.

The net result: what many expected to happen to China ATO, actually happened BTO (Before The Olympics). From here, all signs point to the government shifting course and beginning to stimulate the economy. It has already authorized a 5 percent increase in the amount which banks may lend and has increased certain export tax rebates. In addition, fiscal policy will be stimulative the rest of this year and next. China still operates under a five-year planning cycle, and infrastructure spending tends to be highest during the second, third and fourth years of the Five Year Plan. (2008 and 2009 are the third and fourth years, respectively, of China’s Eleventh Five Year Plan.)

The Chinese economy will certainly slow further during the remainder of this year, but that was already in the works due to measures taken by the government last year, and has little to do with the Olympics. How slow could things get? Lehman’s China economist Mingchun Sun predicts that GDP growth for the second half of 2008 will slow to 8.7 percent. Sun also predicts Chinese GDP growth will cool to just 8 percent in 2009.

Because I believe that measures will be taken to stimulate a decelerating economy and that infrastructure spending will remain high, I am much more optimistic about 2009.