Quakes Challenge China's Economy

China's 1-trillion-yuan ($147-billion) earthquake recovery plan for Sichuan poses challenges for the country's economy, experts say.
By Michael Lelyveld

BOSTON--China has backed away from its target of rebuilding Sichuan in a little over two years, but the decision may reflect the size of the task rather than concern about the costs, economists say.

On Aug. 28, China's State Council approved a plan to restore the region, which was shattered by a May 12 earthquake, "over the next three years," the official Xinhua news agency said. Previously, Premier Wen Jiabao pledged to fund reconstruction "over the next two years," Xinhua reported in May.

The government's plan suggests a target of late 2011 rather than the end of 2010 to rebuild areas struck by the disaster that claimed over 69,000 lives. Provincial officials in Sichuan have estimated that reconstruction will take three years to complete.

By early July, Sichuan had built over 1.6 million temporary houses in an effort to shelter 4.5 million homeless families. Over 1.1 million were still living in tents, under tarpaulins, or with relatives, according to state media. The temporary houses are designed to last for three years, Minister of Housing Jiang Weixin said in May, setting an effective deadline for the rebuilding plan.

The possibility of a speedier timetable raised questions about the impact of the effort on production of cement, steel, and other materials that have been blamed for much of China's economic, energy, and environmental problems.

Increased demand

In June, the People's Bank of China (PBOC) warned against the inflationary consequences of the big rebuilding effort. "Large infrastructure construction will increase demand for cement, steel, and other building materials, and the impact on their prices should not be ignored," the PBOC's Institute of Finance Research said, according to Xinhua.

The cost of the program also appears to be far larger than first thought. Initially, the government budgeted only 70 billion yuan ($10 billion) for relief and reconstruction costs this year. The three-year plan estimates that costs will total 1 trillion yuan ($147 billion), more than three times the investment in preparing for Beijing's Olympic Games over the past seven years.

But in interviews with Radio Free Asia, economists said the major factor in the government's plan is likely to be the scope of the reconstruction rather than the inflationary impact.

"These projects take time," said Harvard University economics professor Dale Jorgenson, referring to the 2011 target. "Three years strikes me as optimistic, frankly."

Jorgenson said the 1-trillion-yuan budget may also turn out to be too low. "It's going to cost some money, probably a lot more than they're currently estimating," he said.

Materials blamed

New structures will also have to be of higher quality than the destroyed buildings they replace, requiring greater use of quake-resistant materials like steel.

On Sept. 4, Ma Zongjin, director of the National Wenchuan Earthquake Expert Committee, said that poor-quality materials may have been a reason why so many schools collapsed in Sichuan, the Associated Press reported. At least 6,898 school buildings were destroyed in the quake, the official China Daily said in May.

Some 10,000 school children died, sparking public outrage, The New York Times reported in June.

The demand for more high-quality materials is bound to raise demand for construction products along with building costs. But Jorgenson argued that the southwest province is far from China's eastern coastal cities, where construction activity and inflation are highest.

"Mobilizing resources there is not likely to create a serious macroeconomic problem," he said.

Logistical concerns

Gary Hufbauer, senior fellow at the Peterson Institute, agreed that the massive task of shifting resources to remote areas is a greater factor for scheduling than the economic consequences.

"There are huge logistical concerns," said Hufbauer.Materials and equipment may have to be diverted from other projects in China, he said. Hufbauer also said the timetables are likely to slip.

"From what I've followed on earthquakes elsewhere in the world, the reconstruction period is always longer than what is originally hoped for or advertised," he said.

Hufbauer said costs may rise due to the sheer size of the project and the government's spending plans.

"That's a tremendous amount of money, even for an economy the size of China's," said Hufbauer. "You're going to bid up prices of many of the basic materials like cement and steel."

Hufbauer said there is also uncertainty because of the thousands of aftershocks that have followed the May 12 event, raising the risks of further damage and costs.

On Aug. 30, a 6.1-magnitude quake struck Panzhihua City, killing at least 38 in Sichuan and neighboring Yunnan province, state media said. This week, officials were racing to erect shelters for an additional 1.2 million people who were displaced. Over the past two weeks, earthquakes have also shaken Xinjiang and Tibet.

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