Quake may speed up China's pace of investment

By Simon Rabinovitch and Eadie Chen - Analysis

BEIJING (Reuters) - Still grieving the deaths of tens of thousands, China has sketched the first blueprints for rebuilding after last week's earthquake.

The scale will be huge, pointing to a possible pick-up in the already rapid pace of investment. But ultimately, the impact on China's economy will be small and on the global economy, negligible.

Flush with ample, fast-growing tax revenues, China will have little difficulty turning on the cash spigots.

Tents are the crucial need now, but in the coming months China will break ground on houses for 5 million people left homeless -- about equivalent to the population of Singapore.

Plans for new offices, schools, factories and roads -- entire new cities, in fact -- are also being crafted.

"Initially, we'd been looking for investment to moderate over the course of next year, but I think it's clearly going to strengthen, potentially quite markedly," said Glenn Maguire, Asia-Pacific chief economist at Societe Generale in Hong Kong.

"Some of the rebalancing we've seen in growth away from investment towards consumption is likely to reverse," he said.

Concerned about disorderly capital spending, industrial overcapacity and worsening pollution, China has tried to cool investment, issuing a raft of edicts, such as tighter land-conversion rules, and clamping down on bank lending.

The government has scored some successes, dragging fixed-asset investment down to a 26 percent annual growth rate from nearly 50 percent four years ago, but investment still accounted for 42.1 percent of gross domestic product in 2007.

A spending surge in the quake-hit areas and vulnerable cities across China may dwarf the economic cost of the disaster, concentrated in a mountainous corner of southwestern Sichuan province.

"The impact on the full-year economy and industrial production should be very limited," said Xing Ziqiang, an economist with China International Capital Corp (CICC) in Beijing.

Direct economic losses in Sichuan will amount to about 67 billion yuan ($9.6 billion), or 0.27 percent of China's 2007 GDP, the government said this week.

KOBE COMPARISON

Such damage would be far less than that from the Kobe earthquake in 1995, estimated to have cost Japan as much as 2.5 percent of its GDP.

Comparison of the two disasters is somewhat misleading, Goldman Sachs economists Hong Liang and Yu Song said in a note to clients on Wednesday.

"The heavily damaged counties are mostly in remote mountain areas this time in China, whereas Kobe and its surrounding areas are known for its manufacturing prominence," they said.

The 11 quake-stricken counties in Sichuan collectively account for less than 0.4 percent of national grain, edible oil and meat output and only 0.17 percent of industrial production, CICC researchers noted.

But reconstruction spending may yield an important parallel between Sichuan and Kobe.

The bursting of the bubble economy sent Japanese investment into a structural decline in the early 1990s, until the quake, Societe Generale's Maguire said.

"You can see a clear and significant rebound in Japanese investment, especially construction investment, in the year after the Kobe earthquake," he said. "China is going to follow a very similar dynamic."

BLUEPRINTS

Officials in Sichuan say they will unveil a formal reconstruction plan at the end of May, but already the outlines of their designs look ambitious.

Beichuan County, a site of devastation at the earthquake's epicenter, may be transplanted to a new location and rebuilt from top to bottom, the local Communist Party boss said on Tuesday.

And Su Youpo, who helped guide the rebuilding of Tangshan, a northern city leveled by an earthquake in 1976 that killed up to 300,000, said the new cities should be completed within a year.

To turn such blueprints into reality, China will have to summon huge amounts of material, from cement to petroleum, raising the prospect of yet more upward pressure on global commodity prices and domestic inflation.

"But the 'economic' size of the affected areas still suggests rebuilding the area should have limited impact on nationwide aggregate demand and, thereby, prices," Hong and Yu said.

One thing is certain. China can afford the earthquake reconstruction, however lofty its designs.

The country had a fiscal surplus of 170 billion yuan ($24.38 billion) last year and revenues rose by more than 30 percent in the first quarter compared with a year earlier.

"If the momentum in the first three months is sustained, China will undoubtedly have another fiscal surplus this year," CICC's Xing said. "The government has lots and lots of money."

($1=6.972 Yuan)

(Reporting by Simon Rabinovitch and Eadie Chen; Editing by Alan Wheatley)