Reuters reported that severe drought in central China and worsening power shortages are pushing up food prices and hurting factories, but the overall impact on the country's inflation and economic growth will be limited.
Analysts said that the worst drought to hit central China in half a century has gripped the Yangtze farming heartlands like Hubei, Jiangxi, Hunan and Anhui, turning paddy fields and fish ponds into barren cracked land.
But analysts said the drought, which is limited to several provinces and only damages some early rice, is unlikely to have a significant impact on headline inflation.
Mr Gao Shanwen chief economist at China Essence Securities in Beijing said that "The drought will add some upward pressure on inflation, but the impact on nationwide prices will be limited based on historical experience."
Mr Sun Miaoling, an economist at CICC in Beijing, said that the ongoing drought would only affect the summer harvest, which accounts for one quarter of China's annual grain output.
Official data showed that grain output from the four hardest hit provinces of Hubei, Hunan, Jiangxi and Anhui account for 20% of national output, 20% of total pork, mutton and beef output and 18% of national aquatic product output. In terms of specific products, the four provinces jointly produce 38.3% of China's rice, 22.8% of pork and 37.3% of freshwater fish.
Mr Dongming Xie, China economist at OCBC Bank in Singapore, said that he believed that the drought alone could add 0.2 percentage points to annual inflation in May 2011, which could be 5.3%, unchanged from April that was near 32 month highs.
He said that "I don't expect the drought to change the picture for the moment. However, if things are getting worse and last longer than expected, we may have to reassess the impact on China's inflation."
The central bank, keen to put a lid on inflation, has unveiled a series of tightening measures in recent months, including repeated increases in banks' required reserves and interest rates.
Most analysts expect inflation to peak in June or July 2011 and start to ease in the second half due to the policy tightening measures and a relatively higher base of comparison.
Furthermore, the drought, which has brought water levels in some of the country's biggest hydropower producing regions to critical levels, could exacerbate the country's worst power shortages in seven years.
Total capacity at the Three Gorges hydropower project amounts to 18.2 gigawatts. It generated 84.4 billion kilowatt hours of electricity in 2010, delivering power as far afield as Shanghai on the eastern coast.
Mr Gao said that the cut in hydropower production will put pressure on coal fired power plants, which are facing capacity strains and rising coal prices. He added that "This will in turn push up the cost of manufacturers and force them to raise prices."
He estimated that the power crunch, which forces factories to cut production hours, could lower China's second quarter industrial output growth by 0.5 percentage points or a 0.2 percentage point cut in economic growth. But Mr Gao still expects the economy to retain much of its momentum, growing 9.5% YoY in the second quarter as compared with the 9.7% pace of the first quarter.
Chinese factories expanded activity in May 2011 at the slowest pace in 10 months while price pressures eased, a purchasing managers' index showed on Monday, adding to evidence that the economy is moderating as a tighter policy starts to bite.
Most analysts believe fears of an abrupt slowdown in the economy are overdone due to solid domestic and external demand.
(Sourced from www.reuters.com)
