Quake may speed up China's pace of investment
Reuters
Wednesday May 21 2008
By Simon Rabinovitch and Eadie Chen
BEIJING, May 21 (Reuters) - Still grieving the deaths oftens of thousands, China has sketched the first blueprints forrebuilding after last week's earthquake.
The scale will be huge, pointing to a possible pick-up inthe already rapid pace of investment. But ultimately, theimpact on China's economy will be small and on the globaleconomy, negli gible.
Flush with ample, fast-growing tax revenues, China willhave little difficulty turning on the cash spigots.
Tents are the crucial need now, but in the coming monthsChina will break ground on houses for 5 million people lefthomeless -- about equivalent to the population of Singapore.
Plans for new offices, schools, factories and roads --entire new cities, in fact -- are also being crafted.
"Initially, we'd been looking for investment to moderateover the course of next year, but I think it's clearly going tostrengthen, potentially quite markedly," said Glenn Maguire,Asia-Pacific chief economist at Societe Generale in Hong Kong.
"Some of the rebalancing we've seen in growth away frominvestment towards consumption is likely to reverse," he said.
Concerned about disorderly capital spending, industrialovercapacity and worsening pollution, China has tried to coolinvestment, issuing a raft of edicts, such as tighterland-conversion rules, and clamping down on bank lending.
The government has scored some successes, draggingfixed-asset investment down to a 26 percent annual growth ratefrom nearly 50 percent four years ago, but investment stillaccounted for 42.1 percent of gross domestic product in 2007.
A spending surge in the quake-hit areas and vulnerablecities across China may dwarf the economic cost of thedisaster, concentrated in a mountainous corner of southwesternSichuan province.
"The impact on the full-year economy and industrialproduction should be very limited," said Xing Ziqiang, aneconomist with China International Capital Corp (CICC) inBeijing.
Direct economic losses in Sichuan will amount to about 67billion yuan ($9.6 billion), or 0.27 percent of China's 2007GDP, the government said this week.
KOBE COMPARISON
Such damage would be far less than that from the Kobeearthquake in 1995, estimated to have cost Japan as much as 2.5percent of its GDP.
Comparison of the two disasters is somewhat misleading,Goldman Sachs economists Hong Liang and Yu Song said in a noteto clients on Wednesday.
"The heavily damaged counties are mostly in remote mountainareas this time in China, whereas Kobe and its surroundingareas are known for its manufacturing prominence," they said.
The 11 quake-stricken counties in Sichuan collectivelyaccount for less than 0.4 percent of national grain, edible oiland meat output and only 0.17 percent of industrial production,CICC researchers noted.
But reconstruction spending may yield an important parallelbetween Sichuan and Kobe.
The bursting of the bubble economy sent Japanese investmentinto a structural decline in the early 1990s, until the quake,Societe Generale's Maguire said.
"You can see a clear and significant rebound in Japaneseinvestment, especially construction investment, in the yearafter the Kobe earthquake," he said.
"China is going to followa very similar dynamic."
BLUEPRINTS
Officials in Sichuan say they will unveil a formalreconstruction plan at the end of May, but already the outlinesof their designs look ambitious.
Beichuan County, a site of devastation at the earthquake'sepicentre, may be transplanted to a new location and rebuiltfrom top to bottom, the local Communist Party boss said onTuesday.
And Su Youpo, who helped guide the rebuilding of Tangshan,a northern city levelled by an earthquake in 1976 that killedup to 300,000, said the new cities should be completed within ayear.
To turn such blueprints into reality, China will have tosummon huge amounts of material, from cement to petroleum,raising the prospect of yet more upward pressure on globalcommodity prices and domestic inflation.
"But the 'economic' size of the affected areas stillsuggests rebuilding the area should have limited impact onnationwide aggregate demand and, thereby, prices," Hong and Yusaid.
One thing is certain. China can afford the earthquakereconstruction, however lofty its designs.
The country had a fiscal surplus of 170 billion yuan($24.38 billion) last year and revenues rose by more than 30percent in the first quarter compared with a year earlier.
"If the momentum in the first three months is sustained,China will undoubtedly have another fiscal surplus this year,"CICC's Xing said. "The government has lots and lots of money." ($1=6.972 Yuan) (Reporting by Simon Rabinovitch and Eadie Chen; Editing byAlan Wheatley)
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