Economic implications of Sichuan earthquake Go back »

2008-06-19 | Southwest China

The 7.9 magnitude earthquake in Sichuan province on 12th May wreaked a devastating toll. More than 69,000 are confirmed dead with the figure expected to top 80,000 by the time rescue workers complete their grisly clean-up. In comparison to the human cost, any economic impact would be negligible. But the financial implications are even smaller than would be expected from a quake this strong and in what is China's most populous province.
 
More than 81 million people live in Sichuan, but estimates put the number of those directly affected at about 10 million, far lower than the number affected by the storms and floods that brought large swathes of southern China to a halt last winter.
Some analysts and business owners even conclude the quake will ultimately boost Sichuan's growth rate – before the quake the highest in China – because of the resultant government investment in new schools, roads, homes and other necessary infrastructure. Others say the positive news reports from foreign media on quake relief efforts have helped raise Chengdu and Sichuan's profile on the world stage and will in turn attract more investment.
 
"Some of the world's largest economies are in earthquake zones, in Japan and in Silicon Valley," says Michael O'Sullivan, Secretary General of the European Chamber, who believes investment will continue to flow in because of "the continuing advantages of this location."
"We see a greater willingness by investors to visit Chengdu because they want to contribute to development. I also think relief efforts have made a good impression."

Business leaders agree. "The earthquake was a tragedy," said Alf Moufarrige, CEO of Australian serviced office supplier Servcorp, which opened premises in Chengdu in October. "Commercially it won't make much of a difference. In fact, it probably will be good for the city. "Since the earthquake I've been to Europe, Japan, Singapore, back to Australia and I don't think I've ever seen China portrayed in such a positive light. Before when I said I was going to Chengdu, nobody knew where it was. But now everybody does."
Moufarrige says his company's plans to double its presence in Chengdu remain unchanged despite the earthquake. "Maybe people will be scared but I don't think that will matter," he said.
 
Damage
 
Estimates of the total financial cost of the earthquake vary. The chief economist at the State Information Center told the Beijing Review damages could run to US$86 billion, while AIR Worldwide, a risk modeling firm, puts the loss at more than US$20 billion.
Whatever the final cost, reconstruction money is already pouring in. The government has earmarked US$10 billion for rebuilding efforts and money from the private sector and individual donation is also at an unprecedented high. According to O'Sullivan, EUCCC member have already donated 314 million RMB (US$45.3 million) and a few days after the quake the EU Commissioner for Development and Humanitarian Aid Louis Michel pledged 2 million euros (US$3.1 million). EU member countries have also contributed their own donations.
 
Business affected
 
More than 14,000 industrial companies were damaged in the quake, mostly in the cities of Mianyang and Deyang. Along with Chengdu, these two cities are the main industrial hubs of Sichuan and count for 45 percent of the region's GDP.

Mianyang, a mining city of 5.2 million, lost more than 21,000 people in the quake. Deyang, home to a number of machinery factories and the famous baijiu label Jiannanchun, lost more than 17,000 of its 3.8 million population. Estimated economic losses are greater than in Mianyang and could run to 200 million RMB (US$28.9 million).

Overall, Sichuan industrial enterprises are estimated to have suffered 204 billion RMB (US$29.14 billion) in economic loss, with 97 percent of those loses occurring in Deyang, Chengdu, Mianyang, Guangyuan, Aba and Ya'an, according to statistics from the State Council.

But despite the extensive damage, many of the larger companies hit by the earthquake don't expect long-term repercussions.

Dongfang Electric is based in Hanwang and was one of the worst affected businesses in the immediate earthquake zone. More than 500 employees and employee family members were killed at its Hanwang factory and housing compound. However, the company, one of China's top power generator makers, says it expects to return to 80-percent production capacity within six months.

In Mianyang, Sichuan Changhong Electric lost one employee and estimated direct damages to total 149 million RMB ($21.4 million). Two weeks after the quake the Shanghai-listed company issued a statement saying long-term losses would be minor.

In Chengdu many companies closed in the immediate wake of the earthquake, but mainly as a precautionary measure. Most had opened again a few days later. The Intel plant in the High-Tech zone was running on backup power but staff returned by midweek after the Monday quake. The shares of 45 companies in the quake zone on the Shanghai stock exchange were suspended from trading on May 12. By Wednesday, 32 were back on the trading floor.

Utilities, too, while temporary affected, bounced back quickly. The earthquake damaged PetroChina’s oil pipeline to Sichuan but 22 hours later it had resumed operation, according to brokerage firm CLSA. CLSA also said 1 percent of national hydro capacity was shut down, accounting for just 0.2 percent of the total national power output, and two weeks after the quake Sinopec said 97 percent of its Sichuan gas wells had resumed production. Sichuan provides 20 percent of China's natural gas. It also provides three percent of it aluminum and three percent of its coal, but according to CLSA the quake is not expected to reduce significantly these contributions either.
 
Agriculture
 
Sichuan is one of China's main pig farmers, so there were fears the earthquake could push up pork prices already at historic highs. Pig deaths in the quake, however, only came to 800,000, or less than 1 percent of Sichuan's annual production. In all, only a few pig farms were closed because of the earthquake.
Sichuan is also one of the top five regional producers of rice, oilseeds and vegetables, but CLSA analysts predict only short-term effects caused by the quake because the mountainous areas the earthquake centered on is not a large agricultural base.
 
Construction
 
Upwards of 4 million homes were destroyed in the earthquake, and a Beijing real-estate advisory group warned of a "psychological shadow" hanging over Sichuan and Chongqing that could dampen real-estate investor confidence. However, in Chengdu, global real-estate advisor DTZ says long-term effects will be small. "According to our clients, the earthquake will have a short-term effect on their projects over the next month but will not affect them in the long term," the company said. "Chengdu will remain one of the best markets in West China and developers and clients will continue to expand in this market."