Beijing was elected the host city on July 13, 2001, during the 112th IOC Session in Moscow, defeating Toronto, Paris, Istanbul, and Osaka. After the first round of voting, Beijing held a significant lead over the other four candidates eliminating Osaka. In the second round, Beijing was supported by an absolute majority of voters, eliminating the need for subsequent rounds.
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Because of China's amazing economic growth over the years and their more democratic ideals in their government, the IOC believes that China has much potential to host the Olympics. At the end of the closing ceremony, IOC president Jacques Rogge announced that "it (the 2008 Beijing Olympics) is truly exceptional"
Countries can apply to host the Olympics. Note that not all countries will wat to do so as it costs billions of dollars. Beijing cost over 40 billion dollars.
Usually there are five coutries that a panel of people vote for. Each round the country with the least votes is eliminated. This proceeds until there is one country left, or one country gets more than half the votes.
The people that vote are from all different countries to remove most bias that could arise.
The Olympics was held in Beijing because it was voted for over Toronto, Paris, Istanbul and Osaka. It won only in the second round with 56 of a total of 105 votes.
I guess because it was at a nice location, maybe because it was widely known, and because it's the capital.