Floods Threaten to Stunt China’s Economic Growth

SHANGHAI —  The catastrophic floods that are sweeping away Chinese farms and factories and threatening major cities may also wash away some of the country’s much-needed economic growth, financial experts say.

The Yangtze and Yellow rivers that cut through the heart of the country overflow so often, with such sudden destruction, that the Yellow is known as “China’s sorrow.” This year, waterways in the industrial northeast are breaking their banks as well, increasing the potential devastation and economic disruption at a time when China can little afford it.

This summer’s floods have already claimed thousands of lives, left millions homeless and done an estimated $24 billion in damage, the government reports. The floods are concentrated in just a handful of provinces, but when railways are swept away, workers diverted from factory lines to guard the flood’s front lines, and harvests destroyed, the effects trickle throughout the country in small but significant ways.

One of the biggest worries in Beijing is that the floods might drag down an already slowing economy, with the resulting homelessness and joblessness leading to social unrest.

The government has staked its credibility on achieving 8% growth this year to create new work for those thrown out of their jobs under China’s market reforms. But reaching that target is unlikely, economists say.

“The floods could reduce GDP by about 1 percentage point,” said Andy Xie, a China specialist at Morgan Stanley Dean Witter in Hong Kong, citing the damaged grain harvests and industrial interruption as the largest factors. That means projected output may fall short by about $7.7 billion this year.

“The floods are the most visible, but not the most important, reason behind China’s economic slowdown,” Xie said. The Asian economic turmoil has dried up a significant source of foreign direct investment and hit China’s exports hard. But the biggest problems come from economic mismanagement at home, resulting in stockpiles of unsold goods and deflation, Xie said.

Beijing officials are still optimistically holding to the 8% figure, but government analysts say privately that China will be lucky to reach 7% growth--and will likely come in even below that. Industrial output had already slipped in recent months, the State Statistical Bureau reported this week.

Analysts searching for a silver lining say that wide-scale reconstruction after the waters recede could actually boost the economy. “From the macroeconomic point of view, the floods may lift domestic demand,” Wang Guoxing of Fudan University in Shanghai told the Financial Times.

The government has pledged to increase infrastructure spending to stimulate the economy in the second half of the year.

But post-flood repair and environmental protection are different from the type of big payoff infrastructure spending needed to kick-start growth, Xie said. If there is any good news to be wrung from the disaster, it is that the flood damage to crops and factories may help shore up falling prices caused by oversupply, he said.

Ironically, the economic damage wrought by the floods, combined with Asia’s economic crisis, may also help minimize political fallout for not achieving growth targets: Natural disasters and external economic crises are not the government’s fault. Beijing has enjoyed international praise for keeping its currency stable while its neighbors offer cheaper exports after devaluation. The floods have become a rallying point to bring together the nation--and distract people from their own problems.

A nationwide campaign has brought more than $123 million in donations from across the country. Television news programs show almost nothing but heroic soldiers battling the rivers; not even President Clinton’s confession that he had had an “inappropriate” extramarital relationship was considered newsworthy enough to interrupt the nonstop coverage. President Jiang Zemin has canceled a trip to Japan; he’s staying home to offer encouragement to the troops, who are building dams and dikes until they drop.

The disaster is “binding the nation together and bringing to life the most essential things that define us as a nation,” the China Daily newspaper said.

Unity notwithstanding, the crisis is severe. An area of farmland about half the size of California is under water, affecting cotton, wheat and rice crops but, significantly, not the autumn grain harvest, which accounts for 75% of total grain production. Earlier this week, cotton futures soared on the New York Stock Exchange after early reports that 1.5 million to 2.5 million bales had been destroyed. China supplies nearly a quarter of the world’s cotton.

At the Daqing oil fields in northeastern China, where more than a third of the country’s oil is produced, about 2,500 of the 20,000 oil wells have been inundated, the necks of the pumps dipping in and out of the overflow like dinosaurs lapping at a water hole. At the Daqing Oil Co., half the office workers had abandoned their desks to help shore up the dikes.

On Friday, the nearby city of Harbin escaped disaster after thousands of soldiers and civilians worked round the clock building sandbag levees and dikes to protect the area’s 9 million people from the overflowing Songhua River. “The city is safe for now,” said a city flood official, but another crest of water is expected in a few days.

The People’s Insurance Group of China has already paid about $123.5 million in compensation for flood damage, nearly triple the amount paid out last year. The company rebutted rumors that the insurance industry had been overstretched by the scale of the disaster.

“Floods happen every year, so people are getting better prepared,” spokeswoman Xu Weichen said. “But the floods aren’t over yet, and the figure keeps getting higher and higher.”

Nearly 1 million soldiers are deployed along riverbanks across the nation, but the nightly news also lauds everyday heroes in their fight against the floods. Reports praised one man, Chen Niangen, who drowned while trying to protect a preserve for rare white-finned dolphins; another show featured an elderly man who had worked hours to help build a dike to protect his village, squeezing his eyes shut when the dike was destroyed so he wouldn’t have to witness waters inundate his hometown.

But the real enemy is not so much Mother Nature as human nature, environmentalists say. Every year, the rivers flood when Himalayan snows melt and summer rains come. But intensive logging in western China has eliminated the stabilizing network of roots that once kept silt from sweeping down the river and filling up lakes and reservoirs, leaving less room for runoff water. An ever-growing population means more people and factories are crowded onto riverbanks and flood plains, making the human and economic toll greater with every flood.

Official reports, now nearly 2 weeks old, say about 2,000 people have died, but relief workers say the toll is many times that.

Farley reported from Shanghai and Chu from Beijing.