Mulling the Impact of China's Snowstorms
China's worst snowstorm of the century, which started in January, has raised alarm bells particularly related to the potential impact on the mainland's already problematic infrastructure and inflation. But some are saying the threat to the mainland's economy is manageable.
Tao Dong, chief regional economist at Credit Suisse in Hong Kong, notes that power shortages and transport disruption have been the biggest casualties of the snowstorm. Around 78% of China's power is derived from coal-fired plants. Without trains to deliver coal freight, the National Power Grid says its latest coal inventory has fallen to just 16.58 million tonnes an all-time low that's just barely sufficient for seven days worth of production.
The snowstorm has also toppled 330 major power lines and 96 electricity transmission towers, worsening China's persistent power shortage woes. Statistics from the National Development and Reform Commission show it is lacking some 10% or 70 gigawatts of generating capacity.
Credit Suisse's Tao estimates the snowstorm has cut industrial production growth by 2%.
Glenn Maguire, Asia chief economist at Societe Generale in Hong Kong, adds that South Asian economies that export goods to China are likely to see a spillover effect. "A more tangible slowdown in exports will become apparent in the first half of 2008, but the second round effects of this will not fully manifest themselves until 2009," he says.
The current crisis has also heightened food-driven inflation in China, a phenomenon that Richard Berstein, Merrill Lynch's chief investment strategist in New York, calls "agflation". It is estimated the storm may have wiped out 10% of national farm production in January alone, according to Credit Suisse's Tao.
"We continue to believe that agflation will remain a force on the inflation front for many years," says Merrill's Berstein. "China's inflation rate may be heading to a 10-year high due in large part to agflation."
However, Credit Suisse's Tao expects food supply constraints to ease in the second half of the year.
Clifford Lam, managing director for Hong Kong strategy and regional property research at Credit Suisse, notes that Hong Kong is not going to be immune from a US slowdown or China tightening. "Earnings are the key and growth is slowing down. The Hong Kong equity market is likely to be trapped in the year of rat," he says.
The mood is not all gloomy, however.
While the storm has certainly highlighted many potential risks for China this year, its total damage will be limited to 0.3% of gross domestic product (GDP). The World Bank has forecast that the total GDP for 2008 will still rise by 9.8% on the back of strong economic fundamentals.
Despite the snowstorm and its potential impact, Credit Suisse's Chan remains overweight on the China consumption story and is bullish on consumer discretionary, consumer staples, health care, internet and telecom services, and properties.
Richard Wong, an investment director for China equities at HSBC fund management arm Halbis, says he believes any stockmarket selling influenced by the snowstorm has been an irrational overreaction to the problems at hand.