In the wake of the quake

The quake is not likely to damage China's overall economy, writes  CLIFFORD COONAN in Hanwang, Sichuan province.

THE DONGFANG Steam Turbine Company in Hanwang looks like it was smashed to pieces by a massive fist. More than 700 workers were killed at the factory when the earthquake struck Sichuan province on May 12th.

The fate of China's biggest maker of power-generating equipment is a potent symbol of the challenges facing Sichuan province in rebuilding after the quake.

There is no economy to rebuild here at the moment. At least 80 per cent of the factory is gone, and indirect economic losses have been estimated at eight billion yuan (€730 million), to say nothing of the need to fill new orders for thermal combustion turbines, nuclear-power generators and wind turbines.

In nearby Mianzhu city, with its roads strewn with debris, one of the most famous companies in the district is the Jiannanchun wine company.

Across the road from the factory, pottery wine jars are scattered and broken - a bitter testament to the difficult future facing the company.

"Jiannanchun has completely stopped production. We've suffered great losses," says the group's deputy general manager, Yang Dongyun, who, with other executives, was surveying the scene to try to shore up the damage somehow.

Chinese insurers are steeling themselves for major losses, though significantly less than insurers would face in more developed markets, and there will be plenty of unpaid mortgages to deal with for the banks.

However, despite the scale of the damage, the loss of upwards of 70,000 lives and the individual horror stories from factories and shops in the region, the earthquake is unlikely to have much of an impact on the overall Chinese economy, barely braking runaway economic growth.

The earthquake has created all manner of new economic uncertainties, but inflation remains the country's most pressing economic problem.

A poor province, Sichuan is less economically significant than provinces such as Guangdong in southern China. Sichuan is certainly less important to the Chinese economy than Kobe, which was levelled in an earthquake in 1995, is to Japan's. And the province's economic powerhouses, including the capital Chengdu, were largely untouched.

Sichuan has 87 million people - more than Germany, but only 7 per cent of the Chinese population. Some 20 million Sichuanese work as migrant labourers elsewhere in the country, accounting for 16 per cent of total migrant workers.

The government's resolute response has boosted pro-China sentiment, which had been flagging in the wake of a violent crackdown on anti-Chinese protests in Tibet in March.

Reconstruction may even provide a fillip for the local economy, helping those who worked in the destroyed factories to find work rebuilding roads and homes.

It is of course feasible that the rebuilding programme will drive inflation higher because of increased domestic demand.

Chinese premier Wen Jiabao, who tirelessly visited earthquake sites to rally the rescue work, told the powerful Chinese state council that the government needed to cut prices and ordered all central government departments to cut this year's budgeted spending by 5 per cent to help fund 70 billion yuan (€6.3 billion) in quake relief and reconstruction.

China has promised to enforce a tight monetary policy and a prudent fiscal policy this year to tackle inflation.

Monetary policy should aim to help China recover from the quake, but it must also continue to fight inflation, China's central bank chief, Zhou Xiaochuan, said during a visit to Chongqing, near the disaster zone.

He called for a "forward-looking" policy that took into account long-term economic development.

"We must meet enterprises' demands for relief and reconstruction work, and also implement effectively economic tightening steps to prevent excessive growth of inflation and investment," he said.

Central bank adviser Fan Gang has also said the central bank is eager to ensure reconstruction work after the quake does not boost consumer price inflation, which is running near 11-year highs.

Since the quake, Chinese monetary authorities have urged commercial banks to step up lending to disaster-hit companies and have exempted institutions in quake-stricken districts from the latest increase in bank reserve requirements - an increase that was designed to help cool the economy.

In a bearish commentary on China's economic outlook, Fan Jianping, an economist at the State Information Centre, a think-tank that is part of the government's economic planning agency, forecast inflation would reach 7 per cent in 2008, up from 4.8 per cent last year.

Despite inflationary pressures and the huge task facing the rebuilding programme, there are hopeful signs. At Jiannanchun, most of the pottery jars were broken and 40 per cent of the company's wine stores were lost in the quake. "But Jiannanchun's core competencies have not been destroyed," says company chairman Qiao Tianming.

This week, Dongfang Steam Turbine was awarded contracts totalling more than five billion yuan (€450 million) from two power producers. The company bosses say it will take two years to get back up and running fully.

Liu Minsong, who has worked at the factory for seven years, showed the kind of resolve that leaves one hopeful that Sichuan will bounce back.

"I don't think we'll have a problem restoring 80 per cent of production by the end of this year. Give us two years. We will be able to build an efficient Dongfang again."