War to Affect China's Economy, but Growth to Continue

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Last updated at: (Beijing Time) Friday, March 21, 2003

War to Affect China's Economy, but Growth to Continue

Economists said Thursday the war in Iraq would have some negative impact on China's economy, but will not dampen the growing economic momentum of the country.

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Economists said Thursday the war in Iraq would have some negative impact on China's economy, but will not dampen the growing economic momentum of the country.

"Although the Chinese economy is unable to escape the negative impact of US-led Iraq war, it will probably continue its rapid growth of the past decade,'' said Huang Yiping, a researcher with Salomon Smith Barney, a member of Citigroup.

He attributed China's capability to sustain rapid growth in a volatile world to its relatively closed economy, improved competitiveness and its accession to the World Trade Organization.

"It is still likely that it will outperform all of its neighbours,'' said Huang.

China's US$300 billion in foreign reserves -- more than five times its short-term foreign debt -- shield it from a possible overseas financial crisis, he added.

But uncertainties still remain depending on how long the war will be, he said.

If a protracted war in Iraq that pushes oil prices above US$80 a barrel, 2 percentage points will be chopped off Asia's economic growth this year, he said.

Zeng Zhugen, an economist from the Economic Research Institute under the State Development and Reform Commission, agreed with Huang saying the Iraq war will only affect China's economy in short time.

"According to our study, the oil price hike will eat into China's economic growth by no more than 0.3 percentage points.'' Zeng said.

Despite importing about one-third of its oil, China's economy is still largely powered by cheap and plentiful domestic coal, he said.

Zhang Qi, an analyst from Haitong Securities, said the impact from the war on domestic stock markets will be more psychological than actual.

Export uncertainty

But the outbreak of war will not reduce the uncertainties hanging over China's export prospects, although this may not have an influence on the flow of foreign investment into China, which is seen as a safe haven.

But manufacturers will be dealt a major blow if the war causes a global stagnation or recession, cutting demand for Chinese-made products, Zeng said.

"Even if the war is finished in a short time, foreign trade could be severely affected if the United States, as China's biggest export market, cannot stimulate its economy as it expected, but is dragged further into the economic doldrums by the war.''

Wang Jian, an economist from the Institute of Macroeconomy under the State Development and Reform Commission, said international investors were likely to transfer more of their money to safe investment destinations, such as China.

As the Iraq situation may have a bigger impact over a relatively longer period than most people expect, China looks like a safer option, he said.

Impact on transport

China's airlines are expected to experience a minimum negative financial impact from the war.

Air China has suspended its only flight to Kuwait due to rising tensions in the Persian Gulf.

Since the airlines rely heavily on domestic flights for revenue, instead of international flights, the domestic aviation sector is unlikely to be affected by the crisis in the Gulf, said Zhang Qi, an analyst with Haitong Securities Co Ltd.

The bigger problem for Air China, and all other airlines, in the event of a war in the Middle East, would be rising fuel costs, he added.

A spokesman for China Eastern Airlines confirmed that the rising aviation fuel price, which has increased by 12.5 per cent in recent days, has increased the airlines' costs by 2.5 per cent.

Fuel expenses usually account for between 10 and 20 per cent of an airlines operating costs, but can balloon to 30 per cent to 40 per cent in the event of a rise in oil prices.

But the government's decision, which allow airlines to raise prices 17 per cent above the recommended fare, rather than 11 per cent, also helps offset the oil price surge, the spokesman said.

Most airlines have already raised their ticket prices to the new maximum level.

While passengers will find a small rise in the price of tickets they buy, it will help air carriers to absorb increased costs caused by soaring oil prices, the spokesman said.

Xu Lirong, president from COSCO Lines Co, said the company has continued its shipping to Dubai in the United Arab Emirates and Damman in Saudi Arabia, where there are 200 sea miles from Iraq.

Because of increased premiums and oil costs, the cost of shipping one standard crate through the Persian Gulf is much more than US$500.

"We will not suffer a lot even if the route stops, because we only have one route to Middle East and it does not account for a big share of our business.''

Contractors pay

Chinese project contracting companies, which have fledgling business interests in Iraq, will also pay for the war.

There are some Chinese companies involved in Iraq, said Liu Mu, manager of the Iraq division at China's Civil Engineering Construction Corp, one of the country's major contractors.

Qian Wei, a director from the China Machinery Equipment Import & Export Corp, said his company now has a three-year power station construction project in Iraq worth US$200 million.

"We are worrying whether the finished part will be destroyed by bombs and whether the debts can be collected.''

Besides Iraq, projects in neighbouring countries are also exposed to danger.

According to Chi Changhai, vice-chairman of the China International Contractors Association, the Middle East area has emerged as an important market over recent years because these countries are wealthy and began to invest huge sums in infrastructure to build roads and ports.

Oil products cost more

Prices of plastics and fibres, the by-products of oil, have kept surging in the last two months, which increases the cost of related industries such as textiles and light industries.

According to the China Fibre Industry Association, the average fiber price increased by 30-40 per cent in March year-on-year.

Cai Xiyi, president of Taiwan Liushang Industrial Company, which sells shoe accessories, said he has received much fewer orders in March, which should be a peak season for the business.

Many people are waiting to see, he said.

Sun Huaibing, an analyst from the China Textile Industry, said the material cost surge will cast a shadow on China's textile industry, which is the major driver of China's foreign trade.

Plastic prices have jumped by 100 yuan (US$12.09) per ton to reach 6,900 yuan (US$834.34) since February.

The sharp rise in plastic prices has in turn pushed up production costs in the toy, shoes and even stationery industries. (China Daily News)

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