China’s ‘tofu buildings’ raise inflation risks

‘Tofu buildings.” That’s what rural Chinese have long called structures thrown up with remarkable speed. They look fine on the outside, but aren’t much sturdier than the bean curd on last night’s dinner table.

It’s hardly news that China’s building boom emphasized haste over quality. Yet, it took this month’s devastating earthquake in Sichuan to underline the point—and with heartbreaking and graphic evidence. The disaster has claimed at least 51,000 lives and displaced 12 million people so far.

Economists are busily probing what the tragedy means for the world’s fastest-growing major economy. For policymakers in Beijing trying to tame inflation, initial opinions won’t come as welcome news.

“The major impact of the crisis will be inflationary in the short term and investment-positive in the medium term,” says Glenn Maguire, Hong Kong-based Asia chief economist at Société Générale.

That’s hardly what you want to hear when you’re trying to keep an economy from overheating.

Sichuan is a landlocked province that accounts for roughly 0.2 percent of Chinese exports. Disruptions in China’s agricultural supply and distribution chains certainly matter.

Maguire points out that the region is responsible for 7.3 percent of China’s rice supply and 4.2 percent of its wheat. It’s also a major producer of pork, a key driver of inflation pressures over the last 12 months.

Inflation rising

China’s consumer prices rose 8.5 percent in April, close to the fastest pace since 1996. Inflation could accelerate to 9 percent in the next couple of months, according to Sherman Chan, a Sydney-based economist at Moody’s Economy.com.

The indirect effects are far more important and harder to predict. They could fan inflation more than economists appreciate in the next 12 months.

A sudden wave of fear is making its way across the nation of 1.3 billion people. Seeing how easily schools, hospitals and other vital structures crumbled in Sichuan is likely to have government officials racing to bring buildings up to code.

It put a spotlight on the infrastructure arms race fueling much of China’s growth. A dozen cities scattered around the nation want to be the next Dalian, Shanghai or Shenzhen. They want six-lane highways, international airports, Grand Hyatts, sprawling universities, modern hospitals and opera houses. This building boom is making China’s economy hard to control.

Global norms

Expect a massive review to take place. Once the death-toll figures are tallied, there will be a price to pay among Sichuan-region government officials. Parents will be asking for years why schools crumbled, why their children are dead and why construction standards veered so far from global norms.

Images of scores of dead children lined up in school yards serving as makeshift morgues have been broadcast around the world.

Expect a huge and expensive effort to avoid a similar scenario elsewhere in the most-populous nation. The manifestation of those fears is likely to ensure that China is growing faster on December 31 than it was at the start of the year.

The central bank can raise rates all it wants, but it won’t do much good. Officials in Beijing can announce all the administrative efforts they want—China’s growth is more likely to accelerate than slow.

Unlucky year

Debt levels also are worth considering. “All the banks are announcing they will lend more to the affected regions,” says Chan of Economy.com. “It’s a great thing [what] the banks are doing, helping the affected areas, but if you look at this as an investor, you will be concerned. These people will have trouble repaying and you are lending more to them.”

As 2008 unfolds, it’s clear this isn’t the magical year Communist Party bigwigs envisioned. They chose August 8 to begin the Beijing Olympics for a reason. Eight is an auspicious number for the Chinese, and 8/8/08 seemed as lucky a date as any to start the nation’s coming-out party.

This year has been anything other than the one President Hu Jintao expected. It started with freak snowstorms that crippled many parts of his vast nation. A crackdown in Tibet drew global condemnation and a chaotic Olympic torch relay.

Bigger challenges

How Hu and Premier Wen Jiabao handle this crisis will be breathlessly scrutinized, and they know it. Thus far, press coverage has been much freer than during the SARS crisis in 2003. Part of the openness reflects a realization that the government’s legitimacy will be affected by its competence in dealing with the quake’s aftermath.

Among the longer-term considerations is China’s one-child policy. Many parents strive to have sons as a kind of retirement plan; they will live with their son’s family in their old age. Those who recently lost their only child will have to find a Plan B. A broader government safety net may be required.

The bigger issue for the short run is avoiding economic overheating. China’s quake may make that challenge more difficult than ever.

Tomorrow, at the end of the annual stockholders’ meeting of the Manila Electric Co. (Meralco), we will know if the Lopez family will still manage the country’s largest power- distribution utility, or if the big block of government shares, led by Government Service Insurance System (GSIS), will prevail.

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William Pesek: China’s ‘tofu buildings’ raise inflation risks

‘Tofu buildings.” That’s what rural Chinese have long called structures thrown up with remarkable speed. They look fine on the outside, but aren’t much sturdier than the bean curd on last night’s dinner table.