January 28,2008

How China's Snowstorms Could Sweep the World Economy

By Ma Wenluo

The snowstorms across large tracts of China, which have led to a semi-paralysis of infrastructure in almost half of the country, together with the slumping stock market, are affecting normal economic activities. It illustrates that China and other emerging economies are being recoupled with the US economy that is sliding into recession. And to some extent, the world economy could become coupled with China’s economy.

And the Prime Minister Wen Jiabao said 2008 could be "the most difficult year for China’s economy." According to World Economic Outlook, 2008 issued by International Monetary Fund and the predictions of the research centre for the Chinese and world economy of Tsing Hua University, China’s GDP growth rate in 2008 has been adjusted from 11.8% by 1% to 10.8%. Tianze Economic Institute, an independent think tank in Beijing has predicted that the growth could drop from 11.4% in 2007 to around 10% in 2008. It also expected that the government has to adjust its tightening policy in May or June. Some economists close to the decision making circle has proposed a fiscal policy to stimulate the growth.  Indeed, China’s economic policy is in a dilemma: the blizzard has exacerbated the inflation and the growth appears to slow down. The government price control may worsen the supply shortage.

Since mid-January, mainland China has seen three large-scale snowfalls, one after the other. The strongest snow and ice storms in fifty years have seriously influenced infrastructures such as traffic, power supply and communications in over ten provinces across the centre and south of the country. Experts at the China Meteorological Administration (CMA) say the weather conditions won’t be obviously improved in the next week.

As China’s Spring Festival, the only opportunity for most Chinese people working in other cities to reunite with their family, is coming near, the government has limited the freight transportation and set aside a major portion of power for people who are waiting at rail stations, bus stations and airports, longing for a ticket to go home.

The world’s largest migration, involving over 2 billion journeys and lasting two months, has worsened the traffic conditions, which were already overloaded. Highways connecting Guangdong province, the developed coastal area, and Hunan province have been closed by the storms and have thus become giant parking lots. Bus stations and airports have also been shut down.

This has placed great pressure on the transportation of coal and oil products, and the supply of power. Due to coal shortages and Beijing’s promise not to raise power prices in the short term in an effort to cope with high inflation, some power enterprises have stopped producing in order to avoid possible losses. The State Council says that seventeen provinces have restricted the use of electricity. China is suffering an unprecedented power shortage and some factories have been forced to shut down. In some areas, prices for commodities are beginning to rise as people worry that goods may not be able to be delivered. This concern has been reflected on the stock market and added to the bad news from the deepening sub-prime crisis in America. On Monday the Shanghai Composite Index  slumped by 342.4 points, i.e. 7.19%, following the largest single day tumble by 354.68 points on January 22nd .    

China’s economy will not be the only victim of the snowstorms; the world will see its influence in a few days.

As a result of the snowstorms, hundreds of millions of Chinese labourers will have to spend a longer time, possibly one week, on their way home, and this may affect the working time of a huge amount of labourers and thus reduce the output of all that is "made in China". China’s foreign trade dependency has exceeded 60%, while the exportation dependency is reaching 30%, and exported goods account for one-third of GDP. The snowstorms have stopped goods and fittings produced in China from being transported to the coastal areas and then shipped overseas. Meanwhile, imported raw materials such as iron ore will be detained in port. The minister at the Ministry of Communications has declared that in order to ensure the transportation of key materials, China will have to suspend the transportation of exported coal and recall vehicles from the international shipping market if necessary. For a while, China’s exported goods will be reduced, therefore affecting international supplies, and to some degree cause a price rise in the importing countries. American’s fourth interest rate cut since September 2007 has especially added to the market’s worries about a recession of the US economy and inflation. 

The coal price in the world market has been rising for seven weeks in a row largely due to the less export and more import of coal from China. The sustained shortage of coal supply will spill over to oil supply and trigger a new round of oil price hike.   

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