FT.com / Asia-Pacific / China - Economy escapes lasting damage from quake

While hundreds of thousands of Sichuan residents in China’s west await the arrival of relief and death tolls approach 15,000 following Monday’s 7.9 earthquake, analysts have begun to assess the quake’s potential economic impact here in China:

The biggest potential economic risk from the earthquake will be on inflation – 8.5 per cent in April – which has emerged in the past year as the principal threat to the economy. Sichuan is China’s largest pig producer – rising pork prices were the initial reason for the jump in inflation last year – and a big rice producer.

“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,” said Ting Lu, an economist at Merrill Lynch.

However, although the earthquake would probably have a short-term impact on prices in the immediate region, economists said it would do little to disrupt agricultural production in the province.

Moreover, national food prices would be affected only if there was sustained disruption to the transport links between agricultural areas of Sichuan and the rest of the country, which appeared unlikely.

Shanghai’s stock market fell 1.8 per cent on Tuesday, and market regulators suspended trading in 66 companies that have significant operations in the region.

Companies that could be hurt by the earthquake include toll road operator Sichuan Expressway, China Telecom, which has a large fixed-line operation in the region, and those in the insurance sector.

Theory suggests that in times when inflation is already high, as currently in China, then a supply shock of even the slightest severity could trigger the expectation of future rice and pork price increases. This expectation may spurn a speculative bout of of food purchases just as supplies are tightened because of the earthquake. The simultaneous speculative increase in demand and quake-triggered contraction in supply may bring about just the price increases that analysis predict.

I won’t be surprised if inflation numbers for May reveal something greater than the 8.5% (22% rise in food prices) experienced in April. Despite economists’ optimism that the quake will have little effect in the long-run, I would predict that in short-run China’s already unstable price levels will see even sharper rises. Might inflation reach double digits in May?

On a personal note, we here at SAS are praying for the victims of the Sichuan quake. Last October my wife and I led 24 tenth graders on a five day cycling trip through the heart of the region where the quake struck. We started at the panda reserve in Chengdu (where thankfully all pandas survived) and rode 100 km northwest to Dujiangyan, the ancient city in the footills of the Himalayas where, sadly, 900 schoolchildren perished when their building collapsed.

Reports indicate that this beautiful city in the hills, home to the world’s oldest (2300 years!) irrigation project running through the heart of the city has been left in ruins. Below is a picture of me, my wife, and the lucky SAS students who cycled through this beautiful region of Sichuan Province last October. The bridge behind us was in the heart of ancient Dujiangyan, only miles from the earthquake’s epicenter. We hope that the suffering in Sichuan is quickly alleviated and that the victims find shelter and solace in the coming days and weeks.

Dujiangyan, Sichuan Province, China. October 2007. SAS China Alive

About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards".

Tags: China, earth quake, economy, Inflation, Sichuan

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