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BIZCHINA> Review & Analysis
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Quake no big hurdle to growth
By Yi Xianrong (China Daily)
Updated: 2008-05-29 15:17 There were worries that the earthquake might add to the inflationary pressure. There were two reasons for this: the earthquake may reduce the supply of agricultural produce for Sichuan province is a major agricultural base of the country; and, the reconstruction would boost the demand of cement, iron and steel and other building materials. Although they have some grounds, the worries are not valid, either. As mentioned above, the epicenter was located among the mountains, which are far from fertile farmland. Most affected areas are not grain-producing bases. The transportation network within Sichuan is working well. So the quake is not going to influence the supply of agricultural produces. Admittedly, the inflation expectation of the market might be changed by the disaster, especially when people see huge volumes of food being sent to the disaster-hit zones. Some in the affected areas might feel nervous over the temporary shortage of food and it is also possible that inflation pressure intensifies for some time. We have a good reference point in the scenario after an earthquake struck Taiwan island on September 21, 1999. The inflation level climbed by 0.5 percentage point after the quake and recovered two months later. Considering the huge area and large number of grain-producing bases of the Chinese mainland, it may see an even lesser fluctuation in the inflation level than Taiwan did. The current round of price-hike is driven not only by the prices of agricultural produce, but also by the property price. The inflation pressure is not going to be eased if the property price remains high. Meanwhile, the fast-rising prices of grains, crude oil and other commodities on the global market are spreading into China. The ongoing institutional reforms - of the land system, the labor market and the environmental protection scheme are more or less pushing up the costs of manufacturers, lifting the overall price level. Compared with these elements, the earthquake in Wenchuan is the least likely culprit for driving up inflation. Insurance industry is often the one that feels the worst shocks from disasters. But the Chinese insurance companies have a relatively low penetration rate in the country, especially in less developed areas such as Wenchuan. So it is easy to predict the insurance companies would not have gigantic bills to pay. The commercial banks would not see dramatic losses, either. By the end of 2007, Sichuan province got a loan of 600 billion yuan from commercial banks, which amounts to only 3 percent in the country's total bank loans. In short, the tremor would only have temporary and restricted influences on China's economic growth. Also the inflation level for the disaster-affected areas would form a very limited portion in the national economy. It would not change the economic pattern or the tight monetary policy. The central bank would probably use fiscal policy tools, such as transfer payments and tax favors, to support the reconstruction of the disaster zone. The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences. (For more biz stories, please visit Industries)
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