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THE worlds attention has been riveted by the devastating earthquake that hit Sichuan Province in May. Apart from timely relief assistance, international think tanks and financial organizations have also been analyzing its impact on the Chinese economy. One of the worlds leading companies for catastrophe risk estimation, Air Worldwide, has stated that the economic loss caused by the earthquake may reach US $20 billion. However, the Financial Times reports that the disaster will not badly impact Chinas economy overall, despite the tragic losses, although analysts at JP Morgan believe that the temporary disorder may result in a new rise in consumer prices.

To learn more, our reporter interviewed Yang Ruilong, dean of the School of Economics at Renmin University, and Xia Yeliang, deputy director of the Foreign Economy Study Center of Peking University.

Growth at Nine Percent

“Keeping economic growth stable and inflation under control require prompt solutions,” Yang Ruilong said. The government has had to adjust its fiscal plans because the disaster destroyed infrastructure and productivity. Therefore, appropriating more money for disaster relief and reconstruction may influence the input into other public services like education and social security. In addition, Yang believes, the quake has created pessimism among investors.

However, he explained that the quake will also boost the market as a result of post-quake reconstruction projects, which will stimulate the building industry, steel production and other related fields. “As a whole, it is possible to keepnational economic growth at nine percent,” Yang said. Meanwhile, Yang appreciates the unity of the Chinese people to rebuild and propel economic development. “Therefore, I am cautiously optimistic about the future,” he said. “Its direct impact on the economy will be limited, and we have the confidence to overcome.”

Yang does not deny that the problem of inflation has been aggravated by the disaster. Inflation has challenged China since 2007, and last Aprils Consumer Price Index (CPI) even reached 8.5 percent. “The increase in transfer payments for disaster relief is likely to raise the money supply, which adds greatly to the difficulty of holding the annual CPI at 4.5 percent,” Yang said.

No Overall Inflation

National economic statistics released on April 16 revealed that both the Consumer Price Index and the Producer Price Index (PPI) rose in the first quarter of the year, when a cold snap hit southern China. It is an open question whether the situation will repeat itself in the wake of the quake.

According to Xia Yeliang of Peking University, the quake is not expected to change the fundamental aspects of Chinas economy, nor to cause overall inflation. “The epicenter is not highly developed and the damaged area is limited. Though prices in earthquake-hit areas will rise due to the possibility of supply shortages, itwill be curbed quickly,” Xia explained. “Compared with the cold snap, we believe the impact on inflation is much smaller.”

People fear that reconstruction efforts could further test the governments tight monetary policy. Xia said he believed the government could adjust its fiscal policy to make it play a greater role in the restoration of quake-hit areas. But those measures would be temporary support policies for disaster regions and do not point to changes in the tight monetary policy, Xia said.

Sichuan Province is a major supplier of grain and pork, but will the quake fuel further inflation? In Xias opinion, there is no need to worry about the agricultural production price, since the impact on grain productivity is slight. The earthquake only affected some local transport and communication systems, which are gradually returning to normal.

But the disaster has really provided a warning, he said. For example, catastrophe prevention equipment must be set up in buildings. Xia estimates that a series of improvement projects for public construction is going to be carried out throughout the whole country. As a result, a large input is required, which may lead to further inflation. To avoid the potential risk, Xia suggested public projects be taken up progressively instead of being rushed into.

Impact within Sichuan

Economists both from home and abroad are analyzing the quakes impact in comparison with the cold-weather emergency earlier this year. Wang Qian, an economist with JP Morgan, states that the earthquake will have a much smaller impact. The cold snap hit a larger part of China, and especially important manufacturing and agricultural centers in south China. It knocked out power, disrupted transportation and destroyed cropland.

In contrast to the snow-hit areas, Sichuan Province makes up 4.2 percent of Chinas GDP, while manufacturing output and export value are 2.5 percent and 0.2 percent of the national total, respectively. Unlike the Chengdu Plain and southern parts of the province, the epicenter in north Sichuan is neither the main grain production area nor the pork industry base. Pig breeding makes up nearly half of the provincial agricultural production value. Fortunately, the disaster had no big influence on these productive areas. As for the middle part of the province, the damaged facilities as well as the weak dams and reservoirs may affect regional agriculture for a while.

It is widely believed that the quake will not change the momentum of economic growth. Wang Tao, a senior economist with the Union Bank of Switzerland (UBS), says that while the destructive quake has introduced some economic uncertainties, GDP growth will be little affected by the disaster.

Shen Minggao, an economist with Citibank China, points out that the populations in quake-hit areas, including Sichuan, Gansu, Shanxi, Yunnan and some other provinces, constitute some 26.7 percent of the national total, but the GDP proportion is just 18 percent. Whats more, the experience of the Japan Kobe earthquake demonstrates that industries can recover in a few months following a disaster.

Foreign banks all believe the quake will have little effect on the national economy. Yang Ruilong agrees, arguing that no turning point for Chinas economy will result as a consequence of the Sichuan earthquake.