China Faces Economic Aftershocks

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Picking Up the Pieces

China continues recovery efforts after a devastating 7.9-magnitude earthquake hit central China on May 12, 2008, and rendered millions of people homeless.

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The largely mountainous inland province of Sichuan, where the quake hit, is not a manufacturing base, accounting for only 3.5 percent of China's gross industrial output. It is, however, an important grain and pork producer, and has China's largest reserves of natural gas. Its five largest cities -- including the provincial capital, Chengdu, about 55 miles from the epicenter -- escaped the large-scale devastation that killed so many in rural areas.

Though the quake damage won't derail China's economy -- reconstruction projects will almost inevitably boost spending -- many economists agree that it is likely to make a noticeable dent in the growth of gross domestic product.

Shen Minggao, a Citigroup analyst based in Beijing, said he is especially worried about energy. "We all know the government controls the price of water and electricity, but there could be a shortage," Shen said.

The most critical global economic issue may be the quake's impact on oil prices. On Friday, crude jumped to almost $128 a barrel in New York on speculation that China, the world's second-largest consumer, after the United States, would have to increase imports because of energy shortfalls resulting from earthquake damage.

Ten power stations in and around Sichuan were knocked out, according to the State Grid Corp. of China. And as of late last week, PetroChina Co. said it had resumed about one-third of its natural gas production in Sichuan. Dozens of its stations and 60 of its drilling rigs also stopped operations.

Additionally, about 400 dams were damaged by the quake. All the roads around the Huaneng Group's Taipingyi hydroelectric plant collapsed, and 50 workers remained trapped.

Over the weekend, the company's emergency coordinator, Wu Jianling, was negotiating with the military for assistance in airlifting the injured. He said he could not address the dam's structural damage or when the plant might produce power again.

"Whether it's in danger of bursting, we just don't know. We haven't been able to personally check," Wu said.

Domestically, whether China can control inflation in the aftermath of the crisis will be a key indicator in how the government is perceived. Keeping the price of basic foodstuffs stable is seen as critical to social stability.

When the price of pork -- the country's meat staple -- began to soar last summer, the premier, Wen, made a high-profile television appearance, urging local officials to contain prices or risk upsetting the country's "harmonious society." Soaring inflation was one trigger of the 1989 Tiananmen Square protests, which were quashed by China's military.

Sichuan province produces more than 11 percent of China's pork and is the heartland of the country's grain industry. With food prices already up 22 percent year over year because of other factors, Chinese officials last week announced the unusual measure of releasing tens of thousands of tons of grains and vegetable oil from national reserves.

The current price for pork has not shifted much, said Citic Securities chief strategist Cheng Weiqing. "But I don't know how long that can last."

In a research report, Lehman Brothers analyst Sun Mingchun wrote that although he did not expect significant disruption in agricultural production, the crisis could still "exacerbate panics on rice supply problems, given recent shortages in the global rice market." This, he said, "could cause rice prices to rise further."

Also last week, shares of Hebei Taihang Cement Co. and Asia Cement Co. jumped in trading on expectations that demand for building materials for new homes and workplaces would bring higher prices.

On Sunday in Shifang, two hours north of Chengdu, a skeleton crew of administrative employees at the Anda chemical plant was communicating with overseas customers and asking workers to report in on Monday.

The factory had tried to open Thursday, but only 10 of its more than 130 workers showed up.

"Everyone is taking a break. People are afraid. The plant needs a safety inspection," said Quan Shaohua, 56, an accountant.

"Our initial thought was to get people out of the shadow of the earthquake quickly," explained Xiang Chaoan, factory director. But now, he said, that might have been too soon.

If the plant is up and running this week, he said, he should be able to keep prices stable. But if it is only partially operational for a longer period, he might not be able to fulfill all his orders.

Xiang, 44, said he has not returned to his house since the earthquake hit, preferring instead to sleep with his family on a tarp on the factory grounds where he feels safer.

He knows intellectually that "living in my home should be okay," Xiang said. "But now the whole county is empty," he said. "You can't help but feel scared."

Researchers Wu Meng and Crissie Ding contributed to this report.