Global Insight Perspective | |
Significance | Reports on the damage resulting from the powerful earthquake that rocked Sichuan and surrounding regions yesterday are still coming in, with the death toll currently at 10,000 or more, with extensive damage to infrastructure and physical structures in and around northern Sichuan. |
Implications | Although Sichuan is a relatively small provincial economy, it is a major supply of certain agricultural products, and the consequences of the damage and dislocation could feed back into the inflation picture. |
Outlook | The quake has severed some key transport and communications lines to areas of Chengdu and Sichuan, and the clean-up and rebuilding will take months. According to statements from Premier Wen Jiabao, the key immediate task is opening the road to the areas in and around the quake's epicentre. |
Background on the Quake
The media in China is awash with images of Premier Wen Jiabao inspecting areas of northern Sichuan that were heavily damaged by yesterday's quake, with an aggressive effort by the government to demonstrate its crisis-response credentials while preserving social stability in hard-hit areas. To date, the details of the quake's aftermath include:
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- The epicentre of the quake was reported to be in Wenchuan county, a mountainous area of northern Sichuan with a local population of around 100,000, located less than 100 km south-east of the provincial capital, Chengdu. According to the China Earthquake Administration, the quake was felt in 16 provinces, including Shanghai and Beijing, with shockwaves also felt as far away as Thailand and Taiwan. Tremors of 6.0 or less were felt in major coastal cities, and sent residents and office workers streaming out of their buildings.
- The quake was the deadliest in China since the major earthquake that occurred in the city of Tangshan, Hebei province, in 1976, which also measured 7.8 on the Richter scale, killing 240,000 and severely injuring 160,000. The extent of fatality in this recent quake could eventually match that from the recent cyclone in Myanmar, according to some unofficial estimates.
- The current estimate of the death toll from the quake reported in China's state media is around 10,000, with this figure expected to grow once more information comes in from areas that may have been temporarily cut off from communications and relief efforts. China's official Xinhua News Agency has reported 8,533 deaths in Sichuan alone. Figures for the number of deaths from the quake in other regions of the country include several fatalities in Yunnan, 57 confirmed dead in Shaanxi, 48 in Gansu and 50 in Chongqing. Perhaps the most heart-wrenching stories that have emerged so far involve two school collapses in Sichuan, trapping hundreds of students and killing an unknown number. Thousands of residents in Wenchuan county are reportedly still buried under debris, while the conditions of at least 60,000 residents at the epicentre are still unknown, as they have been totally cut off from the outside world since the quake struck.
- A reported total of around 50,000 army troops have been deployed to work on disaster relief efforts throughout Sichuan. Damaged roadways are complicating relief efforts, according to the Chinese media, and air drops of supplies are expected to reach areas that are currently unreachable.
- China's state media has reported some 300 aftershocks, though none of these tremors appear to have been large enough to have caused significant additional damage. Damages to residential and commercial buildings have also been reported, with more than 500,000 houses reportedly wrecked by the quake.
- Major damage appears to have occurred to the transport and communications infrastructure in some areas of Sichuan and neighbouring Chongqing, which is complicating relief efforts in some areas. Northern Sichuan is a mountainous area of the country, in some cases lacking strong transport infrastructure in even the best of times.
The Economic Dimensions
The material and human toll from this quake in northern areas of Sichuan is significant and tragic. Looking at these events from an economic perspective, there are a number of regional and national issues to watch.
- At the regional level, Global Insight believes that the economic impact of the quake, particularly on Sichuan's infrastructure, warrants a temporary downgrade of the region's short-term economic prospects and infrastructure ratings as part of Global Insight's China Regional Service, Regional Risk service. By year-end, it may be that investment in reconstruction could—as is typically the case—boost economic activity, though economic development in the next quarter is likely to take a hit.
- Sichuan is in China's less-developed west and, despite being a highly populous (81 million) province, it only accounts for around 4% of China's GDP. International trade and foreign direct investment (FDI) in Sichuan are also small: the province's trade is less than 1% of the national total. FDI in the province is less than 2% of overall FDI into China, so the province's direct impact on the national economy is limited.
- However, one area in which Sichuan could significantly affect the national economy is through inflation. China's recent inflationary flare-up has been driven by surging food price inflation, particularly by soaring pork prices. Sichuan is China's top hog livestock producing region, accounting for more than 11% of the national hog livestock. Should the earthquake severely damage pork supply from Sichuan, China's inflationary environment would worsen.
- One area where the effects of this quake will be more difficult to gauge is the potential impact on buyer and investor sentiment in the real-estate sector. There have long been suspicions surrounding the quality of new buildings going up in many areas in China. Although there have not been reports of significant damage to buildings outside of the centrally affected areas, the thought of future earthquakes could dampen buyer sentiment in the coming months, and potentially have a lasting impact on buyer psychology in the medium term. This change in risk perception about the real-estate sector could directly affect the valuation of local property in a negative way, which in turn could cause ramifications in the financial sector.
- Overall, the impact on foreign investor sentiments hinges on how the Chinese government handles this crisis. Inept crisis management of this severe earthquake would further dampen foreign businesses' confidence in the governance of the Chinese authorities, which already took a hit from the government's mishandling of the emergency response to the severe snowstorms this winter.
- Nevertheless, any negative impact on foreign investor confidence is unlikely to be lasting, given the size of China's market and the speed of the Chinese economic growth.
Outlook and Implications
In addition to efforts to maintain its domestic crisis management and humanitarian relief credentials during a high tide of nationalism associated with the upcoming Olympic Games in August, the Chinese government is also sensitive at this point to the international perception of its response efforts. Within hours of the earthquake, Premier Wen Jiabao was on a plane to the region to serve as the public face of the leadership where relief efforts are concerned. Since the severe winter storms that battered numerous regions of central and southern China, there appears to have been additional behind-the-scenes co-ordination and study in the area of disaster relief, with efforts to demonstrate lessons learned from previous crises. A combination of geographic factors is complicating relief efforts in some areas of Sichuan, though the scale of resources mobilised in this case appears to have been large and swift. These events are testing the flexibility of the Chinese government at a time when it would prefer to keep attention focused on the successful domestic run-up to the Games and other stories that present a strong and united China to the outside world. Taking these factors into consideration, it is expected to be as thorough as possible in its relief efforts, viewing them as an all-around confidence building opportunity.