China Quake Won't Shake Economy

The May 12 earthquake in Sichuan has claimed 12,000 lives, but many economists expect the impact on overall growth to be limited

At 2:48 in the afternoon on May 12, Wu Zhigang was working at his desk at Sichuan Gaojin Food's headquarters in Suining, a city of about 4 million people in the western Chinese province of Sichuan, when the earthquake struck. Although it is 150 miles away from the quake's epicenter, the company's building shook so much that Wu and his colleagues had to run outside.

By 3 p.m. they returned to their desks, but other workers at Gaojin Food weren't so lucky. The company temporarily halted production at the three of its seven food processing plants located closest to the epicenter. The earthquake knocked out power and water supplies and cracked the plants' walls. "This will affect our results, but it won't be a very big impact," says Wu, an employee in Sichuan Gaojin's securities department.

The 7.8-scale earthquake that struck the mountains of western Sichuan province is the deadliest natural disaster to hit China in nearly three decades. The earthquake has claimed over 12,000 lives, mostly from collapsed buildings. However many economists expect the impact on the Chinese economy of the power outages, communications breakdowns, and blocked roads to be limited. "In the short term, there will be a temporary disruption in industrial production, but it should recover very quickly," says Lehman Brothers (LEH) Hong Kong-based economist Mingchun Sun. One reason, he says, is that the quake hit a rural area without a big manufacturing base.

Not as Bad as Winter Snowstorms

Indeed, while the human toll is immense, the earthquake is likely to have a smaller impact on China's economy than the freak snowstorms this winter, which affected a greater swath of the country. Sichuan's economy, like other provinces in China's western region, lags behind China's wealthier coastal regions. The province's industrial output only accounts for 3.9% of China's gross domestic product, according to Merrill Lynch (MER). Sichuan has a population of more than 87 million, roughly the same as Vietnam, and many Sichuanese either stay at home to farm or go to China's manufacturing bases in the southern and eastern regions to work.

When the earthquake hit, most companies, not only in Sichuan but as far away as Beijing and Shanghai, evacuated their employees from offices and factories. Intel (INTC), Toyota Motor (TM), and Yamaha Motor (YAMHF) are among the companies that have suspended operations at their factories in Chengdu, the capital of Sichuan province, while they inspect the damage caused by the earthquake. Semiconductor Manufacturing International Corp., a Shanghai-based chipmaker, also evacuated employees in its semiconductor manufacturing, assembly, and testing facilities in Chengdu. "We had to evacuate. But we expect the disruption to production to be very minor and be back tonight or tomorrow, or very soon," says Matthew Szymanski, vice-president of corporate relations at SMIC.

Other local companies might have a harder time returning to normal. Before they can resume production, many factories need a restoration of electricity and water supplies. Sichuan province lost 4 gigawatts of electrical capacity while neighboring Shaanxi province lost another 1.5 gigawatts after the earthquake knocked out 10 power stations and transformers in the two provinces, according to State Grid Corp. of China. "As a precaution, Intel has removed the facility from local power or water service until a full seismic assessment is completed," Intel spokeswoman Lucy Meng wrote in an e-mail.

"While the current situation is dynamic, we hope to resume operations as soon as possible, pending restoration of utilities and a seismic assessment."

Roads to Disaster Areas Blocked

The earthquake has also created logistical headaches, hampering not only transportation of products but also rescue efforts. Some flights passing over the region have been canceled. Some trains to Chengdu have been suspended. Since the evening of May 12, rain in Sichuan has caused mudslides and debris to block the roads. Soldiers mobilized for relief efforts have had to walk to disaster areas. Premier Wen Jiabao flew to Chengdu Monday afternoon and tried to go directly to Wenchuan, the epicenter of the earthquake, but was unable to because the roads were blocked. Wen ordered the roads leading to areas hit by the earthquake to be cleared before midnight local time on May 14. "After the earthquake, transportation to the disaster area is extremely difficult," Ministry of Civil Affairs disaster response director Wang Zhenyao told journalists at a May 13 press briefing in Beijing.

The difficulties in reaching the disaster areas have been exacerbated by telecommunication problems caused by the earthquake. The country's largest cell phone operator, China Mobile (CHL), said that 2,300 base stations, or 0.8% of the total, stopped working due to power failures or congestion, making it more difficult for friends and family to reach their loved ones (BusinessWeek, 5/12/08) in Sichuan province . Nokia (NOK) and Motorola (MOT) said that they would donate cell phones as part of their disaster relief packages. "Our experience is that when there is [this] type of disasters, phones are actually quite useful for people involved in rescue and also people living in the area," says Thomas Jonasson, director of communications, China area, at Nokia.

Despite the disruptions, companies and economists expect China to bounce back quickly from the earthquake. Many employees were already back at work on May 13. As reconstruction efforts start, the government is expected to boost investment in roads, bridges, and other fixed assets in the second half. Lehman Brothers economist Sun points out that when a 6.9 magnitude earthquake hit Kobe, Japan, in 1995, it temporarily disrupted Japan's industrial output but the region quickly recovered in the coming months. He says, "It's a big tragedy in terms of human life, but in terms of growth it's not a big deal."

Before it's here, it's on the Bloomberg Terminal.