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Wed, May 14, 2008 - Page 10 News List

Analysts warn quake could add fuel to PRC inflation

AFP , SHANGHAI

The huge earthquake in southwest China could drive up food prices even more and set back efforts to tame inflation, experts warned yesterday as stocks slid in Shanghai in the wake of the deadly tremor.

The economy of Sichuan Province is likely to take a heavy blow from Monday’s 7.9-magnitude tremor, which left tens of thousands dead, missing or trapped, although reconstruction efforts should later boost growth, experts said.

“The earthquake will have a severe negative impact on the economy of Sichuan,” said Zhai Peng (翟鵬), an analyst with Guotai Junan Securities (國泰君安證券).

The Shanghai composite stock index ended down 1.84 percent amid worries about the quake, with trading in 66 listed companies based in southwestern China suspended due to difficulties contacting their headquarters.

But although parts of China have been badly hit, analysts said the overall impact on the industrial sector looked likely to be limited as the worst-affected region is more dependent on agriculture than manufacturing.

“While the quake caused significant damages to human lives and infrastructure, we expect its impact on China’s economic growth to be temporary and limited,” Lehman Brothers economist Sun Mingchun (孫明春) wrote in a research note.

The tremor could, however, “exacerbate panics on rice supply problems, given recent shortages in the global rice market,” Sun said.

China’s economy has enjoyed double-digit growth for five consecutive years. With inflation already close to 12-year highs, the main threat to its booming economy from the quake could be rising prices, analysts said.

“It’s obviously going to exacerbate short-term inflation pressures because there’s been disruption to supply chains and it’s a fairly agriculturally heavy province,” said Glenn Maguire, chief economist for Asia at Societe Generale.

China has hiked interest rates and the reserve requirement ratio for banks a number of times to curb inflation and prevent economic overheating.

Even so inflation hit 8.5 percent last month as food prices surged.

The government has made the war on inflation one of its top economic priorities, fearing rising prices could hamper social stability. Analysts said the massive tremor would set back those efforts.

“We expect the earthquake to further fuel inflationary expectations in some parts of China due to possible supply shortages as a result of disruption in transportation,” Merrill Lynch economist Ting Lu wrote in a note to clients, warning the temblor would be “a serious blow to China’s economy.”

But he said that the overall economic impact could be smaller than that of the snowstorms that paralyzed large parts of China over the winter.

“As an inland province, Sichuan is not relevant for China’s external trade, so we don’t think China’s exports and imports will be noticeably affected by the earthquake,” he said.

Analysts said that major natural disasters could actually be positive for the local economy in the longer term in light of reconstruction spending.

“Given that government policy in the past five years has been aiming to accelerate development in the central and western provinces, you probably will see funds mobilized and rebuilding commencing very quickly,” Maguire said.

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