By Huang Liming, Ren Jie
Published: 2008-02-14

From News, page 2, issue no. 353-354, February 4th-11th
Translated by Zuo Maohong
Original article: [Chinese]

The slew of snowstorms and deep freezes that have swept across China have had contained but signifiant effects on businesses, infrastructure, and the economy as a whole. As power grids, roads, and rails were strained or shut down entirely, already-high prices on everyday goods continued to climb. But it's not bad news for everyone-- rebuilding efforts may mean better infrastructure, looser price controls, and windfalls for companies that win government projects.

Disaster struck 14 provinces and cities including Anhui, Jiangxi, He’nan, Hunan, Hubei, and Guangxi as hard frost, snow storms, and hail lingered over 20 days in the areas.

Statistics from Ministry of Civil Affairs show that up to January 31st, the snow and ice had resulted in direct economic loss of 53.79 billion yuan, destroyed 101 million mu (approximately 6.73 million hectares) of crops, and caused the collapse of 223,000 buildings and damage to 862,000 others.

The figures are not yet final, though, because weather had not improved as of the beginning of Frebruary.

How will it all affect the Chinese economy? Neither domestic nor foreign research institutions denied the negative effects of the snows, which have swept half of the country. But in general, they are optimistic.

The Macro-Level: Inflation Harder to Restrain
As hail accompanied snow storms in most disaster areas, roads were frozen and power lines downed due to the accumulation of ice, which in turn, interrupted power supplies and paralyzed the transportation system. Migrants were kept halfway from reaching home for Spring Festival, agricultural products and food prices climbed even more, and water and gas supplies became scarce.
According to the State Electricity Regulatory Commission, so far 17 provinces and cities have restricted power supplies, and the cumulative gap between supply and demand of electricity amounted to 40 million kilowatts at peak time. The snow has reduced power coal reserves, which thus far has dropped to 21.42 million tons, less than half of the usual amount.

Meanwhile, the severe weather has posed a challenge in the short run for aluminum and other metal smelting industries. In Guizhou province of southwestern China, nearly all of the aluminum smelting companies with an annual capacity of 700,000 to 800,000 tons have ceased production as a result of snow-damaged power grids. In Hunan, where one fifth of the country’s zinc and lead is smelted, operation of many companies has also stopped.

According to Ma Jun, chief economist for greater China at Deutsche Bank, on the macro-level, it will exacerbate the already accelerating inflation, by pushing up food prices further in January and February. Stronger inflation pressure (especially coupled with rising inflation expectation) may force the further tightening of macro policy and thus hurt growth, he adds.

Liang Hong, chief economist for Goldman Sachs Asia, agrees that the energy shortage and the transportation bottleneck are likely to increase inflationary pressure and negatively impact the economy. Vegetable and other food prices have surged once again, she says, and judging from the already high inflation, the news may push CPI to a disturbing level for both policy-makers and Chinese investors.

Liang cautions that severer “invisible” inflation buried underneath market-intervening, governmental measures is coming to the surface, adding that in view of the gloomy US economic outlook, whether the Chinese economy will keep its rapid growth depends on its policy choices. A strong rise in exchange rates and a series of measures to encourage domestic demand are needed to solve the fundamental causes of macroeconomic imbalances, she says.

A research report released by China Merchants Securities (CMS) last week said that in view of the price index, impaired freight services make goods supplies difficult, and thus prices for basic necessities such as vegetable may hike since demand still exists. There’s virtually no question that CPI growth will go beyond 7% in January and February, it said.

As the external economic environment deteriorates, domestic economic controls are bound to slow down in the second half of 2008. CMS believes that rebuilding after the disaster requires the support of credit loans, and therefore controls on them might thaw earlier than expected if the situation worsens.

The Micro-Level: A Hit to the Capital Markets
In 1998, China's south experienced a flood that caused the A share market to drop 25 percent. The Shanghai Stock Exchange, on the day the Jiang River flooded, lost just over 8 percent of its value. And during SARS in 1998, the A share market tumbled 15 percent.

But CMS believes that large-scale natural disasters only affect the stock market in the short term, and are panic driven. After the disaster passes, the economy will recover its former growth rate, rebuild demand, and perhaps inject more short-term growth.

Beyond this, the market will worry about about those listed companies who were most affected. Zhuye Group (600961.SH) recently announced that due to a deep freeze in Hunan province, the worst of its kind in 50 years, has damaged power stations and left its power supplies tight. The company temporarily stopped primary production on January 29th, following in the footsteps of Xiantan Electric (002125.SZ), Chenzhou Mining （002155.SZ), Six Kingdom Chemical (600470.SH), and others who had all already announced production freezes.

Ma says that the following sectors suffered the most in share price decline in the days following the 2005 snow storm in the US : (1) railways, (2) hotels, (3) airlines, (4) agriculture, and (5) distributors.

At the sector level, he says the obvious victims from the short-term disruption to travel activities are the transportation sector, including many airlines, airports, expressways, railways, hotels, and travel agencies. Regarding specific highways, he believes the Sichuan Expressway was hit the hardest, followed by Zhejiang Expressway. Meanwhile the Shenzhen expressway may in fact benefit from the temporary closure of the Guangzhou railway.

Of course, some listed companies will benefit. CMS believes that the disaster will slightly boost coal and engineering machinery firms, and greatly benefit power, railway, and steel equipment producing businesses. And with the snowstorms leading to a bottleneck in coal transportation, coal price will increase in the short term-- though this will possibly be mitigated by the government. At the same time, the power grid and railway electrification system will be upgraded and rebuilt.

According to Deutsch Bank, coal is likely to be a near-term winner also due to higher demand for heating. They say that demand for staple food (for example, instant noodles) and winter coats is surging, and demand for coastal shipping tends to rise as it is being perceived as a more reliable alternative to disrupted roads and railways.

The bank says that one long-term beneficiary may be the railway sector, as the government should realize the reach of its transportation bottleneck problems and become more aggressive in implementing a massive upgrading and consolidation program for railroads after the storm.

CMS, in communicating with these various industries, has discovered that the effects of the disaster were not excessive for any single particular industry, and the government may begin loosening control of credit and prices. What is certain though is that any drop in prices that resulted from the irrational, panic-driven selling off of shares leaves open a great buying opportunity.