China quake fans inflation worry in hard-hit areas

BEIJING (Reuters) - As China reels from its worst earthquake in three decades, economists say the fallout could compound inflation in areas closest to the damage but price pressures are unlikely to be lasting or widespread.

The human toll was still rising on Tuesday, with nearly 12,000 dead and rescuers still trying to reach many others buried under collapsed buildings.

In coming days, delays in getting agricultural produce to market from fertile Sichuan could push up the cost of food, already the main driver of consumer price inflation, which is running at 8.5 percent, just off a 12-year high.

"We do think the quake increases upside risks to China's inflation outlook, especially on food price inflation," Lehman Brothers economist Mingchun Sun said in a note to clients.

China's benchmark stock index closed down 1.85 percent, partly on fears that the disaster would add to the inflation headache.

Sichuan and Chongqing account for more than 9 percent of China's rice output, but the quake largely devastated a steep and rainy area that is mainly known for oranges, peppercorn and vegetables.

China suspended rail traffic between Sichuan and other provinces, calling for safety checks, and roads into the worst-affected regions were cut off by landslides.

The government also told oil and gas wells, chemical plants and coal mines in the stricken area to halt operations and inspect for damage. But the impact on the energy sector was expected to be limited as there are few facilities in the area.

The epicenter, north of the provincial capital, Chengdu, has little manufacturing. Early responses from metals plants near Chongqing, which account for about 4.5 percent of China's aluminum capacity, indicated little damage there.

However, Antaike, a state-owned research group, said some zinc smelters in Sichuan and neighboring Shaanxi and Gansu provinces had halted production, closing perhaps 400,000-500,000 tonnes of smelting capacity, about 11 percent of China's total.

Ting Lu and TJ Bond with Merrill Lynch in Hong Kong said the disaster would undoubtedly add to price pressures.

"We expect the earthquake to further fuel inflationary expectations in some parts of China due to possible supply shortages as a result of disruption in transportation," they said in a note.

SNOWSTORM COMPARISON

But they said the quake would have less of an economic impact than the severe winter weather that paralyzed much of southern China in January and February, cutting transport links and disrupting output for weeks.

Several power plants shut down or disconnected from the grid after the earthquake had already resumed normal operations and Petrochina restarted a major oil pipeline after a one-day stoppage to ensure safety.

An unseemly conclusion for analysts looking at the overall economic impact of humanitarian disasters, such as earthquakes, is that they tend to be pro-growth because of heavy spending on reconstruction.  Continued...