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Experts: Tremor likely to be felt in prices

By Xin Zhiming (China Daily)
Updated: 2008-05-21 09:11

Tremor of the May 12 earthquake is more likely to be felt in macroeconomic regulations as inflation continued to hover above 8 percent in April.

"People are assessing the impact of the quake, but life is priceless," said Zhuang Jian, senior economist with the Asian Development Bank (ADB) in Beijing.

But he added that while the quake caused extensive casualties and damage, it will not shake the overall development of the national economy. "The overall impact on gross domestic product (GDP) growth won't be very big."

Agreed Liang Hong, economist with the Goldman Sachs Asia in Hong Kong. "A severe natural disaster of this magnitude will likely have a negative impact on the real economy, but it's likely to be limited and short-lived," she said in a research note.

Sichuan province constitutes about 4 percent of the national GDP and its industrial output accounts for only 2.5 percent of the national total.

The hardest hit counties are mostly in the remote mountain areas. The quake-induced short-term loss of production is thus likely to be very limited, she said.

The reconstruction work after the quake is expected to contribute to GDP, investment and consumption growth, further mitigating the impact of the quake on economic growth.

But the quake may mount more inflationary pressures, which is a bigger concern and requires tighter policies, said analysts.

In April, the consumer price index (CPI), the key gauge of inflation, rose 8.5 percent, second highest in 12 years. The producer price index, a leading indicator of inflation, rose 8.1 percent in April, the ninth consecutive month that it increased.

Analysts said it could take about six months for producer price rises to be transferred to the consumer price zone. Therefore prices in the second half of the year may not ease significantly, as some economists had anticipated.

The ample liquidity in the market will worsen the situation, said Sun Lijian, economist with Fudan University.

Meanwhile, China's imports of major commodities such as oil and raw materials will add to domestic inflationary pressures.

The central bank had raised the bank reserve requirement ratio shortly after the CPI figure was released last Monday, pointing to the urgency of controlling prices.

Since Sichuan is a major rice producer, the quake may intensify fears of food price inflation, especially against the backdrop of global rice price rise, said Sun Mingchun, senior economist of Lehman Brothers Asia.

The severely damaged transport links could make things worse. "There could be renewed pressures on food inflation because of Sichuan's relative importance in agricultural production and the damage to the transportation system," wrote Goldman Sachs' Liang.

Given the April inflation figure, people are concerned the current monetary policy may not be tight enough and some are arguing for another increase in the interest rate.

"Inflation is a very serious problem and will hurt the Chinese economy," warned Chen Gong, chief economist and chairman of Beijing-based Anbound Consulting.

But by using the reserve requirement ratio as a tool to restrict liquidity, the central bank seems to be reluctant to raise the interest rate, analysts said.

"Policymakers try to strike a balance between controlling inflation and maintaining sound economic growth," Chen said. "It's a tough goal."

Whether or not to raise the interest rate, however, does not depend purely on domestic factors. Policymakers must take into account the condition of the US economy and the Federal Reserve's interest rate cuts since a widening of the gap between Chinese and US interest rates will lead to inflow of speculative money, said Zhu Baoliang, senior economist with the State Information Center.

Some economists also warned the US economy may continue to sink deeper, dragging down the world economic growth and demand for Chinese exports.

"If policymakers rush to raise the interest rate now, they will be left with less room later if the Chinese economy slows," ADB's Zhuang said.