mother nature might be slamming on the breaks to china's economy near term
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Weather Chills China's Economy
Snow and cold have crippled transportation on the mainland, leading to higher inflation and power shortages that are bound to slow exports
Jeffrey Schwartz, the CEO of McDonald's' (MCD) China operation, boarded a plane on the morning of Jan. 28 in Shanghai for what should have been a routine flight to Beijing. But with some of the worst winter weather in memory hammering the country's transportation network, there are no routine flights in China these days. Schwartz didn't arrive in the Chinese capital till that night. "That hour-and-45-minute journey took me 12 hours," he says. "It was the snow."
Millions of people throughout China are suffering far greater hardships. One of the worst snowstorms to hit China since the government began keeping records in 1950 has wreaked havoc throughout the country. At least two dozen people have died in accidents and 827,000 people have been displaced. Heavy snowfall has caused gridlock at train stations and airports, just two weeks before the Chinese New Year begins and hundreds of millions of Chinese return home for the holidays.
The weather is already taking its toll on the Chinese economy. So far the snowstorms have cost $3 billion in damages, according to the Civil Affairs Ministry. The heavy snow, sleet, and freezing rain have created transportation bottlenecks for travelers as well as for shipments of coal, vital to fueling China's power plants. Over the weekend a power outage forced authorities to cancel trains from Beijing to the southern metropolis of Guangzhou, stranding 600,000 passengers at the Guangzhou train station. Guangdong province has halted train ticket sales from Jan. 27 to Feb. 6, and bad weather has forced 19 airports across China to shut down. On Jan. 28, the Shanghai stock exchange plunged 7.2%, hitting a five-month low, on worries about the economic impact of the freeze. Shares did not recover much Jan. 29, rising less than 1%.
Jarring Slowdown Feared
The concern among economists is the weather's impact on China's inflation problem. Even before the storms of January the consumer price index was rising at a troublesome rate, with prices in December jumping 6.5%. Much of that was from rising food prices, due in part to a pork shortage following a devastating swine flu outbreak last year (BusinessWeek.com, 8/17/07). Now, "because of the transport disruption and the damage to farmland, food prices may go up even more rapidly," says Paul Cavey, an economist with Macquarie in Hong Kong. The Agriculture Ministry's basket of wholesale food prices "has shot up quite remarkably" this month, he adds; it rose 11%.
Soaring prices and electricity shortages are bound to have an impact on China's export machine. Roughly half of China's provinces have reported brownouts because power plants could not get enough coal. "A lot of factories will close because households will be given priority for using electricity," says Mingchun Sun, an economist in Hong Kong with Lehman Brothers (LEH). "That will hurt production and exports." Sun predicts export growth—which has been running at 22% over the past four months—to slide to as low as 10% in January. And since factories will close for a week during Chinese New Year next month, export growth in February will be disappointing, too. (There was no Chinese New Year slowdown last February; a change in tax laws that took effect after the holiday encouraged companies to go into overdrive in the weeks beforehand.)
While Sun says the chances of a rebound in the spring are good, he worries that rising inflation and falling export numbers could jolt an economy that already has been slowing. On Jan. 24 the government announced that economic growth for the fourth quarter of 2007 was 11.2%, still torrid but down from 11.9% six months earlier.
The difficulty for Beijing's policymakers is that they want the overheated economy to cool off some, but not so much that job growth sputters at a time when demand from China's biggest export market is likely to fall as the U.S. teeters on the brink of recession (BusinessWeek.com, 1/24/07). "People are already expecting an export slowdown," says Sun. "If they see two months of slow export growth, that could cause some problems in confidence."
Confidence is taking a hit now in many sectors of the economy. Over the weekend, ice storms forced authorities to restrict electricity to factories and plants in the center of the country. One company affected was Sydney (Australia)-based mining company Sino Gold, through its operations in Guizhou province. Sino Gold's plant normally needs 30 megawatts of power to extract gold from the gold ore, but recently has only been able to get eight. The company originally expected to produce 12,700 ounces of gold for February, but with the plant running at less than full capacity it will have to dial back its forecast. "We were previously told we were likely to be on full power by the 28th," says Jake Klein, Sino Gold's chief executive. But that deadline has passed and he's not optimistic. "With the extreme weather, we're told that the restrictions will continue," he says.
Drought Raises Demand for Coal Power
For now, multinationals operating in China are trying to remain upbeat, saying that business hasn't been affected. Dell (DELL), for instance, employs 3,000 workers in the southeastern city of Xiamen, where the computer company builds PCs for the Chinese market. Xiamen has been spared the worst of the weather, says Dell spokesperson Sharon Zhang, and most of Dell's suppliers are based nearby. "For manufacturing there is definitely no impact," she says. Still, Dell commits to a four-hour response time if customers need on-site technical support, something the company will obviously be hard pressed to do right now. The Chinese New Year is a peak shopping season in China, and the transportation bottlenecks might hurt the ability of stores to stock up on inventory in the days before the holiday. However, Zhang says, that shouldn't be a big problem for Dell. "The majority of the goods should be at the stores already," she says.
Chinese meteorologists blame global climate change for the unseasonably high snowfall. However many of the resulting problems have been exacerbated by recent government decisions. Of the 17 (out of a total of 31) provinces to report power shortages, most are concentrated in central China. It's no coincidence that since last winter, that part of the country has been experiencing the most severe drought in 50 years. "These areas use hydropower more than other areas, so the drought in these areas affects how much electricity they can generate," Zhu Hongren, deputy director of the macroeconomic planning agency National Development & Reform Commission's economic cooperation bureau, told reporters at a Jan. 28 press conference.
Since Jan. 12, the western city of Chongqing has been restricting electricity to factories and asking some of them to start their vacation early. The abnormal amount of snow has caused power lines and supporting pylons to snap like twigs. Plus, without hydropower, Chongqing is relying entirely on coal-fired power plants, forcing them to overwork and break down. Because Chongqing does not have its own coal mines it needs to buy coal from other parts of China and transport it to western China, and that too has posed a problem. "Since December, we haven't been able to get enough coal," says He Ruisheng, director of Chongqing Electric Power's press office.
China's coal supplies have dropped to 21.4 million tons as of Jan. 25, half of its normal levels. Chinese power plants' ravenous demand partially explains the steep drop in coal supplies, but there are also other factors. In a research note to clients, Goldman Sachs (GS) economist Hong Liang points out that the government caps electricity and gasoline prices, but allows market prices of coal and oil to continue to rise. Hence it's not surprising that power companies are reducing electricity supply as their profit margins get squeezed. Also, authorities have been cracking down on unsafe mines and closing small mines.
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