China picks up the pieces

Posted in China , Other | 04-Jun-08 | Author: Olivia Chung| Source: Asia Times

People walk in a street in earthquake-hit Yingxiu town in Sichuan province.

HONG KONG - As the death toll from China's May 12, 8.0 Richter-scale earthquake climbs toward the 70,000 mark, with 15 million people rendered homeless, companies are struggling to get back on their feet - lamenting their lost staff while giving thanks to varying degrees for the extent to which their property survived the disaster.

A 70 billion yuan (US$20 billion) government reconstruction fund is underpinning recovery efforts in the stricken southwest Sichuan province, with vast amounts of infrastructure requiring attention. The economic losses will definitely be larger than those caused by the once-in-50-years snowstorm that hit central China this year, National Bureau of Statistics deputy head Xu Xianchun said in Beijing last week.

The impact on economic growth will still be less than 0.1%, but the disaster will put considerable upward pressure on inflation, making it difficult for Beijing to meet its 4.8% full-year target, he said.

And while individual factories can be rebuilt in Sichuan or elsewhere, the area's vital tourist industry will be harder to bring back to life. The quake damaged 1,645 cultural relics in Sichuan, including 148 regarded as precious.

Direct economic losses caused by property damage, and indirect losses caused by business interruption, are expected to reach 500 billion yuan, BNP Paribas financial analyst Doris Chen wrote in a research report last week.

The overall impact on the country's economy will be limited due to the province accounting for only 4.3% of national gross domestic product, said Yi Xianrong, a researcher with the institute of finance and banking under the Chinese Academy of Social Sciences. Sichuan, with a population of 81.7 million, has a gross domestic product (GDP)of 1.5 trillion yuan.

The worst-hit cities in Sichuan, including the provincial capital Chengdu, Mianyang, Deyang and Mianzhu, which together account for about 2% of national GDP, Liu He, deputy director of the Office of the Central Leading Group on financial and economic affairs, said.

In terms of industrial added-value, Sichuan accounts for 3.1% of the country's total, with the worst-hit cities representing only 1.3%, Liu said.

Disruption to production caused by the earthquake would reduce national second-quarter GDP growth by 0.3 percentage points, but this is likely to be made up by post-quake reconstruction in the second half, HSBC economist Qu Hongbin said.

Even so, the local impact of the disaster will clearly be much more severe, with agriculture also being hit hard, along with industry and tourism.

Sichuan is China's major pork- and rice-producing province, producing 10.4% of the country's meat and 5.8% of its grains, Liu said. "The disaster-hit areas produce about 4.3% and 1.6% of the country's meat and grains respectively," he said. With local production hit, help in meeting demand in the area may have to come from elsewhere, he said. Pork is the most consumed meat in China.

Qu echoed Liu's views, saying high food prices will last longer than they would have otherwise. Inflation is now more likely to stay around 8% in the coming months.

Reconstruction will also help to put pressure on prices, officials said. "Post-quake reconstruction will exacerbate already overheated demand for metals and other commodities, thereby adding to inflation pressures," Qu said. "All this leads us to revise our full-year consumer price index [CPI] projection for 2008 to 6.8 % from 6.4%," Qu said.

The CPI, the main gauge of inflation, rose 8.5% in April from a year earlier, up from a 8.3% gain in March.

The Sichuan quake caused 67 billion yuan worth of damage to a total of 14,207 private and state-owned industrial enterprises, the Ministry of Industry and Information Technology said on May 19.

China National Chemical Corp and China Railway Engineering Corp were among 152 state-owned companies affected. Others included Dongfang Electric Corp, Sinohydro Corp and State Grid Corp of China, for a combined 30 billion yuan in losses.

More than 3,000 employees of state-owned companies were either dead, injured or missing after the disaster, Li Rongrong, director of the State-Owned Assets Supervision and Administration Commission (SASAC), said earlier.

Dongfang Steam Turbine Plant, which provides 20% of the operating revenue of Shanghai-listed Dongfang Electric Corp, China's second-biggest maker of power equipment, is still counting its losses in Hanwang town in Mianzhu.

Chen Xinyou, deputy general manager of the plant, said several of its buildings collapsed, killing about 100 of the more than 5,000 workers, while the total death toll including families killed in the residential compound was about 400.

Even so, the quake has had marginal impact on the company's boiler and power generator businesses, Chen said. "Except for the steam turbine plant in Mianzhu, other plants under the company have started operating since May 19."

Dongfang Steam has already secured a total of 2,000 mu of land (133 hectares) in Deyang economic development zone and the Tianyuan economic zone, both in Sichuan, for reconstruction, Chen said, reflecting pledges from Vice Prime Minister Li Keqiang and the SASAC's Li Rongrong that the central government and the commission will do their best to help reconstruction efforts.

Dongfang Electric has signed contracts with several companies since the quake, including a 4.5 billion yuan deal with China Huaneng to provide six thermal power units, each with a capacity of 660 megawatts (mW). The company will also provide several wind power units, with a combined capacity of more than 4,000 mW.

"Within six months, we will have recovered about 80% of our pre-quake production capacity," Chen said. "We will be back in full swing within two years."

Dongfang Electric shares had gained 5.96% to 34.65 yuan by Monday from 32.70 yuan on May 26 on the Shanghai Stock Exchange. That still leaves them about 23% down from their May 12 price of 44.85 yuan.

Other enterprises getting back on their feet include computer chip makers Intel Corp, the world's largest, and Semiconductor Manufacturing International Corp (SMIC), the biggest made-to-order chip maker on the mainland. Both reopened their facilities after halting operations briefly.

Intel's chip assembly and test facility in Chengdu, 88 kilometers from Wenchuan, the earthquake epicenter, returned to full capacity on May 16, Joe Chen, a company spokesman in Shanghai, said. The plant, which is used to package and test silicon components, suffered no structural damage as it was built with an anti-earthquake design, he said.

Intel invested $525 million in establishing the facility in Chengdu, which employs 1,600 workers. It has another assembly and test facility in Shanghai and will start operating a $2.5-billion wafer plant in Dalian in 2010.

"Our quick reopening has indicated our confidence in relief and reconstruction work in Sichuan," he said.

SMIC halted operations at its Chengdu assembly and test plant on May 12, reopening the following day. "Given the experience of overseas employees, including those from Taiwan, many of whom went through a 6.5-magnitude earthquake that struck Taiwan in 1999, our facility has an anti-earthquake design, so none of the 1,500 employees [in Chengdu] were hurt and no major equipment was damaged," SMIC's acting chief financial officer Morning Wu said in Shanghai. She estimated total damage at the Sichuan facility at between $2 million and $3 million.

The area's aluminum industry looks to be taking longer to get back on its feet. Sichuan Aostar Aluminum Company and Sichuan Guangyuan Aluminum Company, with a combined smelting capacity of 400,000 tonnes, both face production curbs due to a mixture of plant damage and supply disruptions.

The cost of damage at Sichuan Guangyuan Aluminum Company, which has a smelting capacity of 150,000 tonnes, will reach hundreds of millions of yuan, a company official named Zhang said on the phone. None of the 1,000 employees was killed, although a few suffered slight injuries in the earthquake, she said.

Zhang said equipment was damaged, but "the reason for the company's failure to return to full capacity is the shortage of raw materials due to disrupted transport links".

Sichuan Aostar, the largest producer of the metal in the province, had enough material stockpiled to feed its plant for 10 days, Tang Yan, an operations manager, was quoted as saying by China Daily.

Transport on the main Baoji-Chengdu railway has been disrupted, cutting a third of Aostar's monthly alumina supply of 22,000 tonnes for one of its two plants. That adds to the woes of a company already concerned about the impact of a strengthening local currency, falling consumption in the US and macroeconomic control policies imposed in the country to rein in fast growth.

China will continue to implement policies to prevent prices and investment in reconstruction work from rising too fast, though it should meet the needs of enterprises for quake relief, Zhou Xiaochuan, governor of the People's Bank of China, said in a statement on the central bank's website.

Meanwhile, the earthquake may have dealt a crushing blow to Sichuan's tourism sector, with its ancient monuments severely damaged where they have not been utterly wrecked and the much-admired natural scenery ravaged by landslides.

Sichuan, the only province in the country whose tourism revenue makes up more than 8% of the provincial GDP, last year received 1.86 billion domestic tourists and 1.71 million from overseas. Turnover from tourist spending jumped 24.3% last year to 121.7 billion yuan.

Zhang Gu, director of the Sichuan Tourism Bureau, was quoted as saying by China Daily that direct economic losses in the tourism sector caused by the earthquake are estimated to exceed 50 billion yuan.

Olivia Chung is a senior Asia Times Online reporter.