China- Will Flooding Impede China's Economic Recovery?

The Southern part of China has experienced torrential rainfall since June.

China Meteorological Administration (CMA) continuously warned residents on the riverbanks and around the Three Gorges dam for heavy downfalls for over 40 days, creating the longest warning streak ever since the warning system started operating. The middle and down stretch of the Yangtze river have received the heaviest rainfall since 1961.

China’s Yangtze River is the longest river in Asia, and unsurprisingly, there exists a long history of floods since day one. This year, however, a wide range of residential areas along the river have been destroyed during the flood season by a high volume of precipitation not seen before. Many provinces have flagged flood alert to I, which is the highest level, including Jiansu, Zhejiang, Anhui and Hubei. As of July 12th, 11 provinces and 130 rivers/affluents were flooding.

Most market watchers concern over the collapse of the Three Gorges dam. According to official data, current water level reaches 164 meters and current volume of reserve water are nearly 30 billion cubic meters. During normal times, the dam allows water level of 175 meters and to reserve 40 billion cubic meters of water. The dam’s total height is 185 meters and there’s still 25% of space available for water. The Chinese authority has also been releasing water from the dam.

With cities and riverbanks underwater, flood season (the “plum rain”) in the Southern provinces has ended last Saturday, according to CMA, and the monsoon is now moving north-bound.

Devastating floods in China were no strangers and they have occurred in 1998, 2010 and 2016.

Inflation, however, has only showed a more substantial increase than normal in 1998. Consumer price tends to head up during summertime and inflation grew mildly without surging after flooding in 2010 and 2016.

China has been spending in building infrastructure for flood control, and floods have since posed lesser threat to the economy. Food price-wise, one-third of the country’s vegetable supply are produced in Sandong, Henan and Hebei province where little serious damage was caused.

The most apparent loss incurs in fixed capital investment. Real estate development and infrastructure construction will be forced to halt due to difficulties in building things outdoors. Investment declined right after flooding in 2016, but soon recovered as the monsoon was over. Mid- and long-term growth in fixed capital investment is still anticipated during the next half of 2020, as interest rate stays low and more public bonds will be available.

Based on historical data, flooding has little impact on production and consumption. China’s unique data “industrial value added” were between 7.6% to 7.9% from June to August in 1998 and between 5% to 6.3% during the same months in 2016, without a significant drop during monsoon. Consumption was also higher by around 5.8% to 7.4% during summer 1998 and around 10.2% to 10.6% in 2016. Both data only fell back in July but recovered in the following month.

▌ So for the next half of 2020, China’s mid- to long-term economic growth is likely to remain steady on its path to recovery and unaffected by the floods.

The past deadly floods since 2003 have caused direct economic losses of less than 1% of China’s GDP, or under 40 billion RMB. Being the first country found and hit by the coronavirus and going through several months of lockdown, China’s economy is set to recover ahead of others. China Q2 GDP showed huge improvement from the previous quarter, grew 3.2% year-on-year. All industries improved and the fundamentals of Chinese stocks are turning to the bright side.

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