Special report: Reconstruction After Earthquake
By Xinhua Writer Wu Qi
BEIJING, May 29 (Xinhua) -- The devastating May 12 earthquake, which left almost 70,000 people dead in and around China's southwestern Sichuan Province, could yet release economic aftershocks that will reverberate through the rest of the country.
While economic experts predict the 8.0-magnitude tremor will have little effect on the national economy, China's poorest, already struggling with soaring food prices, are likely to find their cupboards even barer after the disaster.
Meanwhile, China's economic planners are faced with the dilemma of how to fund reconstruction and economic revival in the affected areas while maintaining the tight macro-economic controls brought in to prevent a financial bubble caused by over-investment in fixed assets.
Most economists and research institutions hold the quake could worsen inflation, which is at an 11-year high, because Sichuan is a major supplier of grain and pork, two of the strongest inflationary forces in the country.
In April, inflation remained high with the consumer price index (CPI) going up 8.5 percent over April last year.
"The Sichuan earthquake will prolong high levels of inflation this year, although CPI growth is still likely to ease in the second half," says Lehman Brothers analyst Sun Mingchun.
"The earthquake, while not affecting a huge amount of output, will slow the ramping up of food supply and postpone a fall in prices, as well as add pressure to non-food CPI inflation once reconstruction starts," Sun says. "The earthquake could exacerbate panic over rice supply problems, given shortages in the global market."
A major agricultural province, Sichuan has 8.2 percent of the nation's arable land and produces 9.2 percent of the nation's grain. Agricultural output makes up about 20 percent of Sichuan's GDP, higher than the 12 percent national average.
The province also produces 11.6 percent of the national output of China's favorite meat: pork in China. The quake is estimated, so far, to have killed only about a million of Sichuan's 60 million pigs. China's farms have about 400 million pigs.
However, transport and distribution disruptions caused by the quake will lead to pork price hikes of up to 6 percent for several months, says CITIC Securities.
Shen Minggao, an economist at Citigroup in Beijing, says Sichuan has rich natural resources, including natural gas and hydropower, but the aftermath of the quake will also drive up prices of these commodities.
Analysts say the double risks of inflation and economic overheating showed no sign of easing in April, indicating the need for increased austerity and controls.
Together with global inflation and accelerated foreign currency inflows, the quake has aggravated the overheating of China's economy.
In April, the country's credit volume saw a record increase of 453.9 billion yuan (65.5 billion US dollars), and the growth of money supply rebounded too. Compounding the excess liquidity problem were strong growth of exports and surging foreign direct investment.
The trade surplus was 16.7 billion U.S. dollars in April, and the additional foreign exchange in the first quarter was more than 150 billion U.S. dollars.
"China's economy is still in danger of rapid overheating," says Zhou Xiaochuan, president of the central bank. "Our monetary priority is the prevention of inflation."
But Zhou faces another challenge too: "While meeting the demand of businesses in quake relief, we must ensure the implementation of macro-control measures."
With inflation forecast to remain the biggest challenge to the steady operation of the economy, the State Information Center holds the government will adhere to its stringent monetary policy and steady fiscal policy, while devising and adjusting some policies specifically for the quake zones.
The National Development and Reform Commission has pledged to be "very prudent" about adjusting macroeconomic policies.
Gao Shanwen, chief economist with Anxin Securities, says the quake might delay the promulgation of tighter control policies in the short-term. But the basic goals -- preventing overheating and curbing inflation -- will be unchanged.
On the evening of May 12, the Finance Ministry earmarked 700 million yuan (100.9 million US dollars) for Sichuan, while the People's Bank of China (PBOC), the central bank, called on its local branches to closely cooperate with finance and civil affairs departments to guarantee timely allocation of disaster relief funds.
The PBOC subsequently announced 55 billion yuan (7.85 billion US dollars) in refinancing for commercial banks and rural cooperatives in Sichuan and Gansu to increase their liquidity and ability to support disaster relief and reconstruction.
It gave banks in six cities hardest hit by the quake a temporarily reprieve on a May 20 rise in the deposit reserve ratio, which had been intended to stifle lending, and it ordered Chinese banks to help victims and relief work by lifting credit lines, extending loan maturities and promptly writing off of bad loans in the quake zone.
Analysts fear the moves could further test the government's tight monetary policy.
China has controlled money supply to curb rising prices and to cool fixed-assets investment that drove the country's double-digit growth in gross domestic product.
"Those measures were just temporary support policies for disaster regions and do not point to changes in the tight monetary policy," says Wang Xiaoguang, a macroeconomic researcher with the National Development and Reform Commission.
INVESTING TO REBUILD
However, Huang Yiping, Citigroup's chief Asia economist, argues: "The government must play a greater role in the restoration of quake-hit areas. It could adopt a properly loosened fiscal policy.
"China has the economic strength to support a positive fiscal policy. The real economy is also crying out support for an expansion-based fiscal policy."
In the past five years, fiscal revenues have grown by 20 to 30 percent annually.
"Over three years, the government could spend an extra 250 billion yuan (36 billion US dollars) a year on quake reconstruction. That's about 1 percent of the GDP in 2007, or about 4 percent of the annual fiscal expenditure," says Huang.
China is strengthening its financial capacity. From 2003 to 2007, the state coffers accumulated 17 trillion yuan (2.5 trillion U.S. dollars). It was 10 trillion yuan (1.4 trillion US dollars) more than the previous five-year period, and growing 22.1 percent annually.
The government also has considerable financial reserves to cope with disasters. This year, it has earmarked 35 billion yuan (5.1 billion US dollars) and established a central budget stability fund worth 103.2 billion yuan (14.8 billion US dollars).
"The government could also sustain more national debt for quake relief and reconstruction," Huang says.
Premier Wen Jiabao announced on May 21 the government would allocate 70 billion yuan (10.1 billion US dollars) this year for are construction fund for the quake-hit regions, to be added to over the next two years. The government would allocate 25 billion yuan (3.6 billion US dollars) for rescue and relief, and 10.8 billion yuan (1.6 billion US dollars) had been delivered by May 23.
STAYING THE ROUTE
The economic fundamentals remained unchanged, the State Council, China's Cabinet, agreed nine days after the earthquake.
"On the one hand, we must continue rescue and relief efforts; on the other, we must promote the sound and rapid development of society and the economy," said Premier Wen.
Despite extreme predictions that the quake will smash the confidence of the capital market and end China's stringent macro economic policy, analysts, including Goldman Sachs and Merrill Lynch, stand by their pre-quake growth forecasts.
"The quake will have a limited effect on GDP growth and further tightening measures are unlikely in the second half," says JPMorgan Chase China head Li Jing.
That is not to downplay the huge losses of lives, property and wealth overnight in the provinces of Sichuan, Gansu and Shaanxi, and in Chongqing municipality.
The quake ruined the economies of dozens of counties. In Sichuan alone, an estimated 6.5 million homes were flattened and 23 million damaged. This was the tip of the iceberg of the damaged or ruined properties in Sichuan.
Initial assessments showed 14,207 industrial businesses suffered 67 billion yuan (9.66 billion US dollars) in direct losses, the Ministry of Industry and Information Technology said on May 19.
Fan Jianping, chief economist at the State Information Center, estimates the Chinese economy suffered a loss of about 600 billion yuan (86.5 billion US dollars) from the earthquake, more than triple that caused by the severe winter weather in February, which swept across central and southern China and disrupted transport and the energy supplies and pushed up commodities prices.
However, Zhuang Jian, senior economist with Asian Development Bank, is among those who maintain the impact of the quake on the national economy will be limited.
Last year, Sichuan saw its GDP value reach 1.05 trillion yuan (150 billion U.S. dollars), accounting for 4.3 percent of the national figure.
The destruction was confined to remote mountainous areas with few factories and little agricultural production. These less developed areas accounted for 0.7 percent of the national GDP, according to the National Bureau of Statistics. The production facilities in major production areas, like the Chengdu Plain, were untouched.
This information lead BOC International to estimate the quake would result in a fall of 0.4 to 0.7 percentage points in economic growth this year.
But however you look at the figures, they're little comfort to those with lives to rebuild.