Since mid-January, China has seen three large-scale snowfalls, one after the other — the strongest snow and ice storms in 60 years. Infrastructure, such as traffic, power supply and communications in more than 10 provinces across the center and south of the country, has been hard hit.
The timing of the storms was catastrophic. It came on the eve of Chinese New Year’s, the world’s largest migration, involving more than 2 billion journeys and lasting two months. Already overburdened transportation was near collapse in many areas. Highways connecting Guangdong Province, the developed coastal area and Hunan Province have been closed by the storms and have thus become giant parking lots. Bus stations and airports have also been shut down.
The rising inflation had spurred speculation, already rampant for months, that Beijing would have to give in to foreign pressures to revalue upward its undervalued currency. Despite Draconian foreign exchange controls, there are estimates that hundreds of millions of hot money have flowed into the system through over- and under-invoicing of China’s huge export sales and other devices.
But the poor return from Chinese banks for its clients — some estimates are that China’s wealthier minority is pushing a savings rate to close to 50 percent — is now sending savers elsewhere. China has now become the second-largest retail gold market in the world after the U.S. Demand for gold products, mainly jewelry and gold coins for individuals, rose a startling 18 percent during the fourth quarter of last year.
The toll of the weather has affected all aspects of the economy.
Due to the halt of the major railway and highway networks, prices for vegetables and fruits have risen significantly in 12 provinces across China. The National Development and Reform Commission (NDRC), responsible for price control, figures that prices for products in some areas has increased by around 100 percent.
Some Chinese analysts compare this storm with the SARS crisis in 2003, and conclude that China’s economy will be greatly affected, at least over the shorter and medium term, and perhaps even with long-term structural effects.
The government’s own market monitoring report released by the Ministry of Commerce also showed that because of the disastrous weather, the wholesale price of vegetables in most cities from Jan. 21-27 rose by 12.6 percent over the previous week. Furthermore, the China Meteorological Administration issued a red alert for snowstorms in some areas, and transporting vegetables will become even harder.
But it isn’t just food prices and the household consumer that have been hit by the weather. Power outages caused by the bad weather have not yet been solved, and this has seriously affected major industries. In late January more than half of China’s provinces had begun rationing power to industries to ensure supplies for residents.
Power failures, brownouts and rationing have struck wide areas of Hunan Province in Central China. Lengshuijiang Steel Plant has been shut down since Jan. 22 and the output of other steel plants in Hunan, such as Xiangtan Steel Co. Ltd. and Lianyuan Steel Co. Ltd., has dropped sharply.
It’s not only power that is hitting Chinese industry but insufficient transportation capacity caused by the weather conditions is also disturbing steel plants, especially for those based in southern China where iron ore and coking coal are relatively rare. Meanwhile, the transportation problem has also caused great difficulties for steel plants deliveries. The Ministry of Railways requires all railway administrations give priority to the transportation of coal for power generation and restrict the delivery of coal for other purposes. This has added to the pressure on the supply of steel plants that urgently need coking coal.
The production of electrolytic aluminum — China is now the world’s largest producer — has also suffered. According to China Business News, the leading business newspaper in Shanghai, nearly 8 percent of China’s production capacity for electrolytic aluminum has halted due to power shortages. Some engineers say that once production is halted, it will probably cause permanent damage to the production capacity and won’t be recoverable. This news sent global aluminum price to $150, an increase of more 6 percent per ton, in the last three days.
It is early but the Chinese disaster is going to impact the world economy.
As a result of the snowstorms, hundreds of millions of Chinese laborers will have to spend a longer time, possibly one week, on their way home, and will reduce the output of all that is “made in China.” China’s foreign trade dependency has exceeded 60 percent, while the exportation dependency is reaching 30 percent, and exported goods account for one third of GDP.
The snowstorms have stopped or slowed goods and fittings produced in China from being transported to the coastal areas and then shipped overseas. Meanwhile, imported raw materials such as iron ore will be detained in port. The Ministry of Communications has declared that in order to ensure the transportation of key materials, China will have to suspend exports of coal and recall vehicles from the international shipping market.
For a while, China’s exported goods will be reduced, thereby affecting international supplies, and to some degree cause a price rise for the importers. The coal price in the world market has been rising for seven weeks in a row largely due to the reduced export and more import of coal from China. The sustained shortage of coal supply will spill over to oil and trigger a new round of oil prices hikes.