China’s Earthquake: Counting the Economic Costs

Rubble from a collapsed building after a strong earthquake hit Southwest China's Sichuan Province.
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Rubble from a collapsed building after a strong earthquake hit Southwest China's Sichuan Province.

Just two days after an earthquake in China killed over 200 people and injured almost 1,000, economists have started to weigh up the implications for the world's second largest economy.

On Saturday China's Lushan county, in the southwestern province of Sichuan, was struck by a 6.6 magnitude quake, close to where a devastating 7.9 magnitude quake killed 70,000 people in 2008.

The earthquake comes at a bad time for China, which is grappling with an outbreak of bird flu and an economy that slowed unexpectedly in the first quarter of the year, but experts expect limited damage to the economy as the scale of the quake is much less in intense than what was seen in 2008.

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Analysts at Bank of America Merrill Lynch say that importantly, no significant manufacturers were situated in Yu'an, the Chinese city closest to the earthquake.

"This is quite different from the Wenchuan quake [in 2008] which severely hit some of the most industrial towns in Sichuan such as Deyang, where the Heavy National Machinery Company and Dongfang Electrical Company were situated," they said in a note published on Monday.

"Thus expect China's industrial production to be little impacted by the quake," they added.

China's industrial output rose 8.9 percent in March from a year earlier, compared with a gain of alost 10 percent in January and February.

Positive Signs

In one positive sign, Japanese automaker Toyota said it would reopen its plant in Chengdu, the capital of Sichuan province, on Monday after closing it temporarily following Saturday's earthquake. The factory was not damaged.

Bank of America Merrill Lynch points out that because of rebuilding after the 2008 earthquake and improved quality in local buildings, the need for rebuilding in the wake of Saturday's earthquake has been greatly reduced.

For instance, no schools collapsed after Saturday's earthquake, unlike in 2008 when many schools crumpled, sparking public anger across China.

New Hope Liuhe, a Chinese agricultural feed producer, said on Monday it had suffered property losses worth about 20 million yuan ($4.05 million) in Saturday's quake, Reuters reported on Monday.

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About 90 other listed firms made earthquake-related statements to China's stock exchange on Monday and while some reported small property losses, all said their businesses had not been impacted.

"As the impact of the Lushan quake is limited to only a couple of counties in remote mountainous areas with small populations [in total about 300,000], we expect the rebuilding need is relatively small," Bank of America Merrill Lynch said in the note.

"Assuming the rebuilding budget eventually comes in at around 10 billion yuan for the Lushan quake, it will be 0.4 percent of Sichuan's 2012 GDP and 0.02 percent of China's 2012 GDP," according to the note.

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Reconstruction can provide an economic boost and expectations of post-earthquake re-building pushed construction stocks listed in Shanghai sharply higher on Monday.

Still, economists expect the overall impact of that boost to be limited.

"It is quite a tragic event clearly and the government will focus on building and reconstruction. That could give a slight boost to GDP as history of past earthquakes show in most countries," said Alistair Chan, an economist at Moody's Analytics in Sydney. "But that's unlikely to be really meaningful in terms of moving the headline China GDP number."

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By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter: @DharaCNBC