Inflation gloom in China snow chaos
By Catherine Jiang in Shenzhen and Olivia Chung

SHENZHEN and HONG KONG - Concern for China's short-term inflation targets grew and the price of boxed lunches surged fivefold in the aftermath of heavy snowstorms - described as possibly the most severe in 50 years - that wrecked havoc across central and southern China.

Shares in some energy-related stocks meanwhile jumped as much as 23% as investors saw profits arising from chaos. The outlook for others was gloomier, with analysts saying some companies faced a hit to first-quarter revenue growth of up to 6 percentage points.

The storms may exacerbate China's already accelerating inflation



in January and February, which in turn may force further tightening of macro policy and thus hurt growth, Jun Ma, chief economist for Greater China at Deutsche Bank, said in a note.

With the chaotic weather forecast by the Central Meteorological Station to continue for a week, Premier Wen Jiabao, reported by national media, said: "The most difficult stage has yet to pass."

The storms hit electrical supplies, coal and food, and left thousands of businessmen and other travelers stranded at airports. Almost half the flights from Shanghai, the country's busiest aviation hub, were delayed according to the Shanghai Airport Authority said.

Hundreds of thousands of workers - more than half a million alone in Guangzhou, provincial capital of Guangdong province, according to Xinhua - were benighted at train stations, many thwarted in their efforts to make long treks to join their families at home for the Lunar New Year, which this year falls on February 7.

Transport breakdowns and power shortages caused by damaged power lines and disrupted coal supplies were partially blamed for a share-price plunge in Shanghai and Shenzhen on Monday, even as some stocks gained. The Shanghai Composite Index dropped 342 points, or 7.19%, on Monday, recovering less than 1% on Tuesday amid gains elsewhere in Asia.

The snowstorms have so far caused about 22.1 billion yuan (US$3.07 billion) in direct economic losses, the Ministry of Civil Affairs said. More than 70 million people in 17 provinces including Hunan, Hubei, Anhui and Jiangxi, inland from the coastal provinces, are directly affected and at least 24 people have been killed, not including 25 when a bus overturned on icy roads in Guizhou province. Some hospitals were overwhelmed by people with fractures incurred in the treacherous conditions.

"So far, 17 provinces, municipalities and autonomous regions have suffered power blackouts, and power grids in Hubei and Hunan provinces in central China and Guizhou and Guangdong provinces in south China have been seriously damaged," the state-run Xinhua News Agency quoted Vice-Premier Zeng Peiyan as saying.

More than 4 million hectares of farmland are affected by the storms, 107,000 houses have collapsed and 399,000 homes damaged, the civil affairs ministry said.

Continued disruptions could create problems in the economy, through short supplies and higher prices, Yi Xianrong, of the Institute of Finance & Banking under the Chinese Academy of Social Sciences, told Asia Times Online.

The government this month made a priority of reining in inflation this year from an 11-year high in November of 6.9%, imposing a price freeze barely a week ago on key household commodities, including grain, edible oils, meat, milk, eggs and liquefied petroleum gas.

The government "has to take stronger measures to adjust inflation", no matter whether the snowstorms had happened or not, Yi said.

Residents are already having to stump up more money for basic needs, even in Guangdong, south of the areas directly hit by snowstorms. Media reported that the cost of some vegetables had tripled in the heavily industrialized province, which imports much of its food from neighboring provinces.

Many of the up to 600,000 passengers estimated by Xinhua to be stuck in Guangzhou railway station due to power failures at other points on the rail line on Monday had to pay up to 50 yuan apiece for boxed lunches, a favorite of rail travelers and normally priced at 10 yuan. Authorities have suspended the sale of train tickets at the station until February 6, Bloomberg reported.

In nearby Shenzhen, across the border from Hong Kong, a woman named Hu said her bus fare home had jumped to 500 yuan from 30 yuan and even at that price tickets were hard to find.

In Hong Kong itself, some energy-related mainland stocks gained amid a general market sell-off. The heavy snow and fuel shortages further north seemed to be used "as an excuse for speculation on the stocks of coal mines," Andrew Wong, associate director of One China Securities Limited in Hong Kong, said.

Shares in coking company Hidili Industry International Development rose by more than 23% to HK$12.66 in early Monday trading from HK$10.24, before closing at HK$10.50, Wong said.

Shenhua Energy and China Coal Energy, the mainland’s top two coal producers, and close rival Yanzhou Coal also gained amid a 4.25% plunge in Hong Kong's benchmark Hang Seng Index on Monday.

Coal shortages have closed down power stations with an aggregate capacity of up to 40.99 million kilowatts, the State Electricity Regulatory Commission (SERC) said on Monday, according to a report in China Daily. The affected capacity equals as much as 40% of last year's expansion in the industry, the report said. Only an average of less than 25% of the daily demand for coal shipment by rail has been met, according to the Ministry of Railways.

The shortages come after State Grid earlier this month said that reserves were down 40% year-on-year to 17.73 million tons, equalling eight days' supply for China's power plants.

Among non-energy shares, Hong Kong-listed Shenzhen Expressway might in fact benefit from the temporary closure of Guangzhou railway, Deutsche Bank's Ma wrote. Otherwise, Sichuan Expressway and Zhejiang Expressway, based in heavily affected provinces, were among "obvious'' likely victims from the short-term disruption to travel activities. Other sectors likely to be hit included airlines, airports hotels, and travel agencies, he said.

"For a number of sectors such as airlines and auto sales, our analysts feel that the on-going disruptions will probably lead to negative year-on-year growth for January and knock off year-on-year sales growth by 3-6 percentage points for the first quarter this year," he said.

Other short-term victims may include power producers (due to disruptions to coal supply), distributors and retailers and construction-related companies, he wrote. Makers of instant noodles and staple foods and of winter coats would be beneficiaries.

Key industries in central China's Hunan province are already looking at severe production losses. The province, which produced 600,000 tonnes of lead and 700,000 tonnes of zinc in 2007, is forecast to lose at least 50,000 tonnes of production of each of the metals because of the snow and cold weather, Reuters reported, citing state consultancy Antaike.

In the longer term, the effects of the snow-caused havoc on inflation would be slight, as they were temporary and came just before the Lunar New Year holiday, when a lot of industry would shut down in any case, said Huang Weiping, professor with the School of Economic at Renmin University of China. "In addition, spending during the New Year holiday will go up simply like other long holidays in China," he said.

An economics professor named Lee at a Hong Kong university agreed. "A natural disaster could happen anytime. But for China, inflation is already there and probably will stay for a while. The snow and natural calamities are contingent but inflation is inevitable."

Ma Hongxing, deputy general manager of Beijing Shi Ji Long Xing Investment Development Company, meanwhile saw other factors behind Monday's stock market decline in Shanghai. "The stock market has been adjusted mainly because of the big drop in Wall Street last Friday," he told Asia Times Online. Individual stocks had been also influenced by valuation concerns regarding big public companies such as PetroChina, he said.

Even so, continued bad weather could disrupt the increasing numbers of businesses that depend on timely delivery of products and services.

Jeffrey Schwartz, chief executive of McDonald's Corp's China operations, said the storms were causing "real challenges in the whole of central China'' to McDonald's, which has 875 restaurants in the country, Bloomberg reported.

"Our average restaurant has two to three days supply of products,'' he said. "Our supply chain manager has been working out a strategy to supply Wuhan if this lasts much longer.''

Maintaining links along the supply chain are being made harder with mobile-phone links proving fragile. The Ministry of Information Industry said mobile communication interruptions had affected more than 33 million users and caused direct losses of nearly 80 million yuan by last Sunday.

That did not stop Schwartz, trapped for 10 hours at Shanghai's Hongqiao Airport, from doing what he could to keep his business flowing. "We were there from 10 am till 8 pm, but we had our laptops, mobile phones and Blackberries so we just set up a little office on the plane."

Catherine Jiang is a freelance journalist based in Shenzhen. Olivia Chung is a senior Asia Times Online reporter.


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