Mounting Economic Losses Reported in China's Quake Zones

Data has been pouring in about economic losses in China's quake-hit areas, with unofficial estimate of direct damages estimated at as high as over 500 billion yuan—far exceeding the 151.7 billion yuan reported losses from the devastating blizzard in China earlier this year. With its magnitude revised by China Seismological Bureau up to 8.0 on the Richter scale, the earthquake has affected 18 cities and prefectures in Sichuan as well as parts of Gansu, Shaanxi and Chongqing. The official death toll has exceeded 32,000, although unofficial estimates have put it at 50,000.

Agricultural Sector Sustains Heavy Damage

China's deadliest earthquake in 32 years has caused "severe" damage to agricultural production in the nation's major agricultural base of Sichuan, said the Ministry of Agriculture in a press release over the weekend. The earthquake damaged the region's irrigation facilities and farmland, delayed harvest and raised the risk of spreading animal diseases, Vice Minister of Agriculture Wei Chaoan told the media. Sichuan is China's biggest pig breeding region and one of the largest growers of rapeseed—the province's main source of cooking oil—and rice. Many of the 13 worst-affected counties and cities are the "food basket" of the province.

The earthquake damaged 500,000 mu (one mu equals 1/15th hectare) of crops, and wrecked more than 50,000 greenhouses. With irrigation facilities severely damaged, the province may be forced to switch to dry-land crops on as much as 100,000 hectares of paddy field, said Wei. Fertiliser production may be scaled back due to plant shutdowns after the quake. This combined with transportation disruptions may further drive up prices for agricultural raw materials, according to industry insiders.

The Ministry of Agriculture also estimated that more than 12 million farm animals were killed by the quake, without specifying the exact figure for pig output losses. Sichuan is China's largest pig producer, with its pig output accounting for 10% of the national total. The province supplied as many as 20 million pigs to other Chinese regions a year, accounting for one third of such inter-provincial pig supply. Chengdu and Mianyang cities are the major pig production bases of the province, although southern Sichuan—where pig production is most concentrated—was not affected by the quake.

Industrial Sector Losses Still Rising

The Sichuan provincial economic authority has revealed to local media that the heaviest industrial economic losses are reported in Shifang city, Qingchuan county, Mianzhu city and Beichuan county. An internal document leaked to local media showed that direct economic losses of 57 major state-owned enterprises (SOEs) in the province had already reached 22.95 billion yuan as of 17 May. The actual losses of SOEs will be much larger than the figure, as the calculation did not count in non-state-owned firms and the 57 reported SOEs only accounted for slightly more than half of major SOEs supervised by Sichuan's state-owned assets supervision and administration commission.

In addition, losses from the suspension of production are likely to be immense, with many major Sichuan companies having stopped operation following the quake. These include two subsidiaries of major steel company Panzhihua Steel, the Sichuan operations of PetroChina and Sinopec, and international chip maker Intel and Semiconductor Manufacturing International. PetroChina alone has cut daily gas output from Sichuan by about 14%.

The quake's effect on nonferrous metal output is substantial. Industry insiders have estimated that about 11% of China's zinc smelting production capacity will be affected by the quake, as at least 10 domestic zinc smelting firms—most of which are located in Sichuan, Gansu and Shaanxi—have confirmed shutdowns for safety and transport concerns. Coal production in Sichuan has stopped, as the authority ordered coal mines affected by the quake to be shut down for safety reasons. Although Sichuan is not a major coal producing province, it is a coal-surplus region, with its coal output reaching 95.6 million tonnes and thermal coal consumption standing at 21 million tonnes in 2007.

Real-Estate Sector May Cool off

The earthquake has reportedly already caused delays in developments and sales, as the local authority ordered a halt of real estate project construction in Chengdu and Chongqing. Chengdu Zhixin Real Estate, the largest developer in Chengdu, has reportedly sustained heavy losses from a major recreational facility project in Chengdu's suburbs and has halted construction of multiple real estate projects in Chengdu following the quake. In addition to delays in development, many real estate companies may also face additional costs for redesigning and reconstructing buildings which are still under construction and which are found in the quake to have failed to meet construction standards, according to industry insiders. Such will likely affect developers' bottom lines and further strain their operating cash flow. In case the construction authority puts in place more stringent limit on the heights of buildings following the quake, the financials of developers that have acquired land at record-high prices last year could deteriorate further.

A longer-term risk also looms for the real estate market in Chengdu and Chongqing, as the earthquake has altered risk perception about these two major western cities and could therefore trigger a downward adjustment of local property valuation. The housing market in Chengdu has already entered a downturn since January, with first-quarter transaction volume down by 23% on the year.

Outlook and Implications

At this stage, it is still hard to gauge the impact of the earthquake in Sichuan on the national economy. Compared with the blizzard which struck China's central and southern regions at the start of this year, the earthquake has not affected as many regions. The six regions that were identified as "severe disaster areas" in the blizzard account for around 14.3% of China's GDP, while Sichuan only accounts for around 4% of the country's GDP. In this sense, the impact of the quake on the Chinese economy may be limited. Nevertheless, the direct damage caused by the quake—both in terms of human death and facility damage—looks to be far more severe than that from the blizzard, which means far greater reconstruction challenge and more prolonged disruption to production.