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July 20, 2020

CHINA: Yangtze River floods threaten supply chains and growth

BY Gabriel Wildau

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China’s industrial heartland is suffering from some of the region’s worst flooding since 1998, causing disruptions to supply chains, while threatening a short-term hit to GDP growth and a spike in food prices. Personal protective equipment (PPE) is among the products facing supply-chain disruption. The government has grown increasingly adept at managing floods in recent years, and pent-up demand is likely to a one-off boost to enhance economic activity after flooding recedes, but key macroeconomic indicators for July and the third quarter will reflect the short-term impact.

Summer flooding on the Yangtze has occurred since ancient times, but this year’s floods are unusually severe. The seven hardest-hit regions – Chongqing, Anhui, Hunan, Hubei, Jiangxi, Jiangsu, and Zhejiang – together account for about one third of Chinese GDP. The completion of the Three Gorges Dam in 2006 helped to mitigate floods, but last week the dam was forced to open three floodgates after the reservoir’s level reached 50 feet above its warning level. Some media have suggested that structural problems with the dam create a risk of collapse, but Chinese authorities have pushed back strongly against these claims. Though defects may create long-run problems for the dam, short-term risks appear minimal.

As of 12 July, floods had severely affected 34mn people, destroyed 28,000 homes, damaged 3.5mn hectares of farmland (around 2% of China’s nationwide total), and caused estimated economic losses of Rmb 82bn (USD 11.7bn), according to official figures. Water levels at several hydrometric stations had surpassed the levels reached during 2016 floods by 13 July and were within one foot of their record highs. Waters have receded somewhat in recent days, but more severe rain is expected in the coming days, especially in Jiangxi and Hubei.

PPE supply chains are facing disruption. Xintao city in Hubei, near Wuhan, produces a third of China’s total exports of nonwoven fabrics, an essential component in medical mask production. Some distributors have reported shipment delays. Beyond medical supplies, agriculture and construction will face disruptions, leading to temporary weakening of demand for construction materials like steel and cement. The result could be a hit to third-quarter GDP growth of 0.2-0.8 percentage points. Consumer price inflation may also spike temporarily due to the impact on food prices, which account for about a fifth of the China’s official consumer price index (CPI) basket. Meat and vegetables are facing the heaviest supply disruption.

After the floods, the economy may bounce back as pent-up demand is unleashed. The government also announced new large-scale water infrastructure projects to mitigate the impact of future floods. The National Development and Reform Commission, China’s state planning agency, announced new water projects worth Rmb1.29tn (USD 180bn) for 2020-22 to deal with the threat of droughts and floods. The agency estimated that when indirect effects are included, the newly approved projects will lead to Rmb6.6tn (USD 945bn) in new investment over this period and create 800,000 new jobs annually.

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