China production expected to rebound quickly after floods

PUBLISHED : Monday, 08 August, 2016, 10:42am
UPDATED : Monday, 08 August, 2016, 10:08pm

Deadly flooding in China has caused billions of yuan in financial losses and a slowdown in industrial production — but possible government spending on repairs could see manufacturing bounce back soon.

Flooding in the Yangtze River basin and northeastern China last month was the worst since 1998 and left a US$33 billion (HK$256 billion) economic toll on the country, according to a catastrophe report released by London-based insurance broker Aon on Thursday. Just two per cent of the damage was covered by insurance, Aon said.

The flooding, which left an estimated 764 people dead or missing, according to the Ministry of Civil Affairs, forced China’s official July manufacturing purchasing managers index to slip unexpectedly to 49.9 from 50.0 the month earlier, the first time since March that the threshold has dipped below 50 into contraction.

We expect the impact of the flooding on industrial production and investment to be temporary, and forecast a rebound later in the year on repairs and upgrades to flood-damaged infrastructure
Standard Chartered Bank economist Betty Rui Wang

But Standard Chartered Bank economist Betty Rui Wang says the impact of the flooding on production in the manufacturing sector was likely to bounce back from September, although it remains difficult to pinpoint exactly to what level.

“We expect the impact of the flooding on industrial production and investment to be temporary, and forecast a rebound later in the year on repairs and upgrades to flood-damaged infrastructure,” she said.

The government is responsible for repairs or upgrades of infrastructure, and has already been promoting repairs of underground pipes and water systems around China, including in Tianjin and Beijing, Wang told South China Morning Post.

“We do see a need or demand for this kind of infrastructure upgrade, even in the medium term.”

She said there would likely be more clues from September at the earliest as to how much repairs or upgrades could help the rebound.

There would also be a need to address local liquidity, Wang said, although the bank didn’t forecast any specific government policies in response to the flooding.

But there was still a high risk of further flooding this month in some major rivers, media reported on Thursday, and Wang cautioned that more flooding could hurt China’s ability to rebound.

“We need to keep an eye on that,” she said.

Not all analysts, however, were as positive as Wang.

David Qu, a Shanghai-based markets economist with ANZ Group, is pessimistic about China’s PMI for the rest of the year, and isn’t expecting a rebound.

“It’s too early to say the flood is over,” he told the Post.

“Overall we think that industrial production in China should still be sluggish in the rest of the year,” he said, adding that the housing market and overcapacity in China would also have an effect.

The government may accelerate its already-budgeted spending on infrastructure after the floods and is likely to further cut the bank reserve requirement ratio in the second half, so banks can lend more, he said.

The flooding came as China’s economy continues to cool, with the world’s second biggest economy posting a GDP growth in the second quarter of 6.7 per cent on last year, matching the first quarter which was the slowest quarterly growth in seven years.

The official July PMI figures contrast with Caixin’s manufacturing PMI for the same month, which rose to 50.6, the first rise into expansionary territory since February 2015 and stronger than the 50.0 expected by analysts polled by Reuters.