China economic spotlight: Costs of the earthquake
China's May 12 earthquake is the country's biggest human tragedy in more than three decades. With nearly 14 million people losing their homes, the social and financial damage is hard to describe in words, let alone in figures. However, the negative...
China's May 12 earthquake is the country's biggest human tragedy in more than three decades. With nearly 14 million people losing their homes, the social and financial damage is hard to describe in words, let alone in figures. However, the negative impact on economic growth will be limited.
The six worst-hit cities and Zhou account for half of provincial GDP in Sichuan and only 2 per cent of national GDP. So a temporary disruption to their production caused by the earthquake may reduce growth in national GDP by 0.3 percentage points in the second quarter of 2008. But this is likely to be made up by post-quake reconstruction in the second half of the year. The impact on the full-year GDP growth rate should be negligible.
These regions produce nearly 5 per cent and 2 per cent of the country's meat and grains, respectively. This implies that high food prices will last longer than they would have otherwise. Headline Consumer Price Inflation (CPI) is now more likely to stay around 8 per cent in the coming months.
To support post-quake reconstruction, the authorities are likely to ease lending curbs marginally in the coming quarters. This means the full-year loan target of RMB3.6 trillion for this year is likely to be exceeded again. Meanwhile, the quake may delay the much-needed rate hike, adding to the risk of inflation.
While post-quake reconstruction should offset the negative impact of the quake on full-year GDP growth for this year, it will also exacerbate already overheated demand for metals and other commodities, thereby adding to inflation pressures. All this leads us to revise our full-year CPI projection for 2008 from 6.4 per cent to 6.8 per cent, while our full-year GDP projection remains unchanged.
It is still too early to tell exactly how much investment is needed to rebuild the quake-hit areas. Based on available information, we estimate that rebuilding homes for nearly 14 million homeless people will require about RMB400 billion in construction spending over the next three years. Combined with needed infrastructure and public facilities, this could push the total amount of rebuilding investment to around RMB700-800 billion. Spread over a period of three years, this implies about RMB250 billion additional construction investment every year for the next three years. The impact of this additional annual investment on China's total fixed investment would be very small since it accounts for just 1.8 per cent of the country's total fixed-asset investment in 2007.
The government first plans to build temporary shelters for homeless people that can be used while the work of city and town reconstruction is carried out. So the chance of an immediate surge in the country's total construction spending remains remote. In fact, the central government has allocated about RMB70 billion for the rebuilding. Even if some additional funds come in from private sources, total additional spending in the coming months will still be a small share of the country's total fixed-asset investment, which topped RMB2.2 trillion in the first quarter of 2008.
How to finance the reconstruction? Since the quake-hit areas are among the poorest regions in the country, the government must play a dominant role in rebuilding. Given that government revenue has surged 22 per cent per annum year-on-year over the last five years (topping RMB5 trillion last year) and an operational budget surplus was run last year, Beijing is in a strong fiscal position to fund the reconstruction. Even if Beijing shoulders all of the cost of reconstruction, our estimated RMB250 billion annual reconstruction investment requirement will be less than 5 per cent of total fiscal revenue last year. Instead of adding to total public spending, relocating government spending from Maglev train projects to public housing should be a better solution, though there would be some resistance to such a shift from vested interest groups.
Having said that, we still expect some marginal easing of credit controls in the coming months to support post earthquake rebuilding. This will add to the regulators' difficulties in keeping full-year new loans this year under the central government target of RMB3.6 trillion.
• This report was compiled by the Marketing Department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.
The six worst-hit cities and Zhou account for half of provincial GDP in Sichuan and only 2 per cent of national GDP. So a temporary disruption to their production caused by the earthquake may reduce growth in national GDP by 0.3 percentage points in the second quarter of 2008. But this is likely to be made up by post-quake reconstruction in the second half of the year. The impact on the full-year GDP growth rate should be negligible.
These regions produce nearly 5 per cent and 2 per cent of the country's meat and grains, respectively. This implies that high food prices will last longer than they would have otherwise. Headline Consumer Price Inflation (CPI) is now more likely to stay around 8 per cent in the coming months.
To support post-quake reconstruction, the authorities are likely to ease lending curbs marginally in the coming quarters. This means the full-year loan target of RMB3.6 trillion for this year is likely to be exceeded again. Meanwhile, the quake may delay the much-needed rate hike, adding to the risk of inflation.
While post-quake reconstruction should offset the negative impact of the quake on full-year GDP growth for this year, it will also exacerbate already overheated demand for metals and other commodities, thereby adding to inflation pressures. All this leads us to revise our full-year CPI projection for 2008 from 6.4 per cent to 6.8 per cent, while our full-year GDP projection remains unchanged.
It is still too early to tell exactly how much investment is needed to rebuild the quake-hit areas. Based on available information, we estimate that rebuilding homes for nearly 14 million homeless people will require about RMB400 billion in construction spending over the next three years. Combined with needed infrastructure and public facilities, this could push the total amount of rebuilding investment to around RMB700-800 billion. Spread over a period of three years, this implies about RMB250 billion additional construction investment every year for the next three years. The impact of this additional annual investment on China's total fixed investment would be very small since it accounts for just 1.8 per cent of the country's total fixed-asset investment in 2007.
The government first plans to build temporary shelters for homeless people that can be used while the work of city and town reconstruction is carried out. So the chance of an immediate surge in the country's total construction spending remains remote. In fact, the central government has allocated about RMB70 billion for the rebuilding. Even if some additional funds come in from private sources, total additional spending in the coming months will still be a small share of the country's total fixed-asset investment, which topped RMB2.2 trillion in the first quarter of 2008.
How to finance the reconstruction? Since the quake-hit areas are among the poorest regions in the country, the government must play a dominant role in rebuilding. Given that government revenue has surged 22 per cent per annum year-on-year over the last five years (topping RMB5 trillion last year) and an operational budget surplus was run last year, Beijing is in a strong fiscal position to fund the reconstruction. Even if Beijing shoulders all of the cost of reconstruction, our estimated RMB250 billion annual reconstruction investment requirement will be less than 5 per cent of total fiscal revenue last year. Instead of adding to total public spending, relocating government spending from Maglev train projects to public housing should be a better solution, though there would be some resistance to such a shift from vested interest groups.
Having said that, we still expect some marginal easing of credit controls in the coming months to support post earthquake rebuilding. This will add to the regulators' difficulties in keeping full-year new loans this year under the central government target of RMB3.6 trillion.
• This report was compiled by the Marketing Department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.