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EDITORIAL: Economic blizzard is a harsh reality

The unusually harsh winter weather in parts of China has put a great deal of economic activity on hold over the past three weeks, but the worst may be yet to come.

As south and central China see the heaviest blizzards in half a century, the scale of their effect has caught the Chinese authorities off guard and raised many issues not only for Beijing, but also the many economies with close ties with China.

China's Ministry of Civil Affairs said that the snowstorms have caused at least 53.79 billion yuan (US$7.5 billion) in direct economic losses as of Thursday. The losses are expected to keep growing, as meteorologists forecast another cold front in the next few days.

To ease public concern, Beijing created a 5 billion yuan emergency fund for farmers last week, while asking its commercial banks to extend more credit to businesses in disaster areas.

On Saturday, the Chinese government released emergency food supplies onto the market to stem inflation, which has already reached the highest levels in a decade in the past few months.

The snowstorms have demonstrated the inadequacies of China's infrastructure. It would be foolish to think that other countries are protected from the effects of China's troubles.

The scenes of hundreds of thousands of migrant workers stranded at bus and train stations ahead of the Lunar New Year illustrated the country's demographic problems. The snowstorms made the urban-rural gap as visible as ever, but will Beijing act to narrow the divide?

Adjusting China's two-track development to close the gap would no doubt mean allowing many of these migrant workers to settle as legal urban residents. That would have the advantage of easing the burden on the country's transportation system, but a change like this would also require a sharp escalation in welfare expenditures.

Poverty, inequality and unemployment remain major, almost intractable problems despite double-digit economic growth the last five years.

The snowstorms have made the economic implications of China's under-development clear. Its poor infrastructure could easily shake the world economy. In the global village the world economy has become, China is a giant factory -- with terribly unreliable roads leading to and from it.

Businesses have suffered power cuts as closed harbors and jammed railroads mean delayed coal shipments, while the cold weather has eaten rapidly into coal stockpiles.

If the storms continue and transport remains blocked after the weeklong holiday, blocked production will mean serious losses for many companies and slowed exports. Meanwhile, food supplies and raw materials will also be held back by ice-covered roads and rails. The result? China's already aggravated inflation will get an unwelcome boost.

In the worst-case scenario, China will be facing a slowing economy and rising inflation -- a double-edged sword. If Beijing reacts to rising inflation by tightening monetary policies, it will discourage companies from borrowing money from banks to expand or invest in real estate.

In the context of a global economy strained by the US subprime fallout and whispers of a US recession, it is unclear how markets would stand a slowdown in the Chinese economy. And if the situation continues to deteriorate in the US, it is not clear how Chinese policymakers will react should that cut into exports.

The situation is delicate and the effects of China's poor infrastructure in combination with a cruel winter could multiply. With its many business across the Taiwan Strait, Taiwan's government has every reason to keep a close watch.
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