Tuesday, May 13, 2008

cost of food 1

China quake fans inflation worry in hard-hit areas

BEIJING, May 13 (Reuters) - As China reels from its worst earthquake in three decades, economists say the fallout could compound inflation in areas closest to the damage but price pressures are unlikely to be lasting or widespread.

The human toll was still rising on Tuesday, with nearly 10,000 dead and rescuers trying to reach many others buried under buildings that collapsed when the earthquake struck in the southwestern province of Sichuan.

In coming days, delays in getting agricultural produce from fertile Sichuan to market could push up the cost of food, already the main driver of consumer price inflation that is running at 8.5 percent, just off a 12-year high.

"We do think the quake increases upside risks to China's inflation outlook, especially on food price inflation," Lehman Brothers economist Mingchun Sun said in a note to clients.
Sichuan and Chongqing account for more than 9 percent of China's rice output, but the quake largely devastated a steep and rainy area that is mainly known for oranges, peppercorn and vegetables.

The area, north of the provincial capital, Chengdu, has little manufacturing. Early responses from metals plants near Chongqing, which account for about 4.5 percent of China's aluminium capacity, indicated little damage there.

Ting Lu and TJ Bond with Merrill Lynch in Hong Kong said the disaster would undoubtedly add to price pressures.

"We expect the earthquake to further fuel inflationary expectations in some parts of China due to possible supply shortages as a result of disruption in transportation," they said in a note.
But they said the quake would have less of an economic impact than did the severe winter weather that paralysed much of southern China in January and February, cutting transport links and disrupting output.

Rail services to Chengdu, including the Chengdu-Baoji line that connects the Sichuan basin to Northwest China, were restored on Tuesday, Xinhua said.

An unseemly conclusion for analysts looking at the overall economic impact of humanitarian disasters, such as earthquakes, is that they tend to be pro-growth because of heavy spending on reconstruction.

In China, this means a government that has pledged to run a prudent fiscal policy will likely relax its purse strings.

"There's going to be a significant investment in infrastructure rebuild as a result," said Glenn Maguire, an economist at Societe Generale.

"In terms of 2009, 2010, some of the rebalancing we've seen in growth away from investment towards consumption is likely to reverse," he said. here