Economists Weigh China Quake’s Toll

While the Chinese government still hasn't put a definitive price tag on damage caused by last month's devastating earthquake in Sichuan, economists and...

People watch water flood the low-lying Qushanzhen area of the devastated Beichuan County in southwest China's Sichuan Province Tuesday.

People watch water flood the low-lying Qushanzhen area of the devastated Beichuan County in southwest China's Sichuan Province Tuesday.

WWD Staff

BEIJING — While the Chinese government still hasn’t put a definitive price tag on damage caused by last month’s devastating earthquake in Sichuan, economists and central government planners say the economic ramifications go far beyond the destruction of homes, businesses and lives.

This story first appeared in the June 11, 2008 issue of WWD.  Subscribe Today.

Inflation, agricultural production, supplies of building materials and tourism are all expected to take a hit from earthquake-related destruction and reconstruction. Rebuilding in quake-devastated areas will likely present the largest of the economic challenges. The government has said it will take three years to rebuild the affected areas of the Sichuan province, where some five million people remain homeless after the 7.9-magnitude quake on May 12 that killed at least 69,000 people. Aftershocks remain a major concern.

The French investment bank Société Générale warned that the earthquake and its long-term aftermath will have a “profound impact” on investment in China, and rebuilding after the quake will likely cost the government $60 billion. The bank pointed to trends in other quake-struck areas such as food shortages and fast-rising inflation.

As yet, China’s leaders have not named a cost for the rebuilding projects in Sichuan, but have ordered all government departments to cut their spending by 5 percent and scale back on travel to inject money into a rebuilding fund. Yet despite the heavy cost calculations for rebuilding homes and businesses lost, top leadership insists the Sichuan earthquake will not have a major impact on the country’s overall economy and growth.

In a press conference on May 28, officials from the National Development and Reform Commission, China’s central economic planning body, said because Sichuan’s economy accounts for less than 4 percent of the country’s gross domestic product, the nationwide impact of the earthquake will be negligible. Mu Hong, vice director of the commission, said the government is watching for price gouging in the affected areas and believes the impact on inflation will be temporary.

“The quake will be a heavy blow to the local economy as many assets and production facilities were destroyed. But it will have a very limited impact on the country’s economic fundamentals,” said Mu.

In spite of that optimism, the Chinese central bank warned of rising inflation from the fallout of the earthquake, especially in building materials like concrete and steel. China has already been battling record-paced inflation for several months, as officials worry fast-rising consumer prices will shake the country’s social stability. Consumer prices rose by 8.5 percent in May over last year, continuing this year’s trend of near-record highs.

Government officials have pledged to keep inflation at or below last year’s 4.8 percent, but the first five months of 2008 have all clocked in above that. In its report on the earthquake, the People’s Bank of China said while Sichuan only makes up 0.25 percent of national production, there are many economic concerns surrounding the disaster. The massive reconstruction efforts will heighten demand for steel, concrete and other building supplies and have an impact on inflation, the central bank warned.

Though the bank’s report, published in a state securities journal, said the inflationary pressure would be temporary, it said the government should adjust monetary policies as needed. “Inflationary pressures remain the biggest risk in the economy,” the bank’s report said. “Curbing price rises remains the government’s key task.”

In addition to concerns about inflation, the earthquake pummeled Sichuan’s tourism industry, government figures indicate. The province has long been popular with tourists for its scenery and wildlife, including the primary habitat for China’s great pandas. The China Tourism Industry reported the earthquake killed 54 tourists and that thus far, it has cost Sichuan and neighboring Shaanxi provinces $7.6 billion in lost revenues. The agency also said some 300,000 people have lost tourism-related jobs.

Meanwhile, Chinese economists say there is no clear solution about how the government should handle the aftermath of the earthquake. Several were critical of a central bank decision ordering state-run commercial banks to write off loans held by businesses and individuals where the property was destroyed. The bank also ordered commercial banks to forgive loans and credit card debt of those who were killed. It has not yet outlined how those millions of dollars in write-offs will be paid.

Zhang Ming, an economist with the Chinese Academy of Social Sciences, said the government’s decision to write off bad loans from the quake was “morally understandable,” but not in line with how a market economy should react. He said the government should issue disaster relief bonds rather than step directly into banking.

“It will be helpful to the affected areas, but it’s bad for the overall inflation rate of the country,” said Zhang. While it will undoubtedly take more time to add up all the costs for the country, Zhang and other economists agree on one thing: The earthquake has set back the local economy in the devastated areas by 20 years.