Chinese economy will withstand disaster

MOSCOW. (Vladimir Portyakov for RIA Novosti) - It is too early to estimate the damage done to China's economy by the devastating earthquake in the western province of Sichuan. Home to 90 million people, Sichuan is one of China's fastest growing and most economically important regions.

According to the estimates I have, in 2005 it produced some 4% of China's GDP (or 738 billion yuan - one dollar equaled four yuan at that time). This was more than Beijing.

The province is now smaller than it was 30 or 40 years ago - Chongqing, China's fourth centrally administered city, was formed into a new municipality. It appears that this city has also suffered from the disaster.

Today, Sichuan is smaller than Henan in terms of population, but it is still one of the biggest producers of rice, and China's staple meat - pork. And although new gas deposits have been found in Xinjiang, Sichuan remains China's biggest gas producer.

The province has a history of pioneering national economic reforms. I visited it in 1978, even before the Communist Party Central Committee's Third Plenary Meeting of the 11th Convocation, the departure point of Chinese reforms. Sichuan was already introducing new ideas. At that time its provincial secretary was Zhao Ziyang, who later became a major leader of the early period of Chinese reforms.

Finally, the province has a rich history and many major historical sites. It hosted the Republican Chinese Government in the late years of the war - in 1943-1946; it is home to wonderful Buddhist temples of the eighth and ninth centuries in Datsun, and a host of famous mountains. Tourism also plays a major role in its economy.

I believe that for all the devastation, Chinese GDP will not drop sharply in 2008. It may decline by fractions of a percent. We can speak about the irretrievable losses of human lives and knowledge. The world-famous Three Gorges hydropower station, located close to the epicenter, has been shut down. But as it has not yet operated at full capacity, the impact should be minimal. There may be some problems with electricity supplies in the South, but they will not be catastrophic.

Nor should food supplies be affected. Hunan is China's biggest rice producer, and there have been no price hikes on rice in China of the kind seen in rest of the world. I don't see that the earthquake will affect the global rice market.

It was immediately clear that the Chinese stock exchange would react to such an enormous tragedy, but it is important to place it in context. After the success of 2000, when trade exceeded six trillion yuan, the market fell steadily until 2006, when a concerned government took corrective measures. Trade jumped to eight trillion, and increased five times last year. But the market was obviously overheated, and started to decline again at the beginning of 2008. When the government reduced taxes on sales of shares to 0.1% the market rallied again, and then the disaster struck. In any event, this is a strictly local phenomenon, and in general the world markets have a very sluggish reaction to changes in China itself.

Returning to the earthquake's effect on China's economic performance in 2008, it is worth recalling that this is not the only disaster to hit the country since January. Last winter, abnormal snowstorms and frosts in the south crippled the railway system at its busiest time; there has been public discontent at inflation; and in March there was international turmoil over human rights violations in Tibet. Against such a turbulent background it is very difficult to calculate the damage done by the Sichuan earthquake.

It is also hard to predict what will happen after 2008. Strange as it may seem, disasters sometimes promote a local economic boom, and compel investors to take a new look at the situation. Following the 1998 earthquake in the small town of Lijiang in Yunnan Province, a commission sent to inspect the town discovered that it still had vast 18th century squares. This led to a tourist boom that is still going strong. Tangshan, site of China's worst earthquake in modern times, is now a major industrial city, to which the Shoudu Iron and Steel Works was transferred from Beijing.

On the whole, economic forecasts for China are not as rosy as they have been. But at least part of this is due to the world financial crisis, and the growth of domestic demand will go some way to mitigating this.

Vladimir Portyakov is Deputy Director of the Institute of Far Eastern Studies, Russian Academy of Sciences.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.