Global Insight Perspective
Significance	New regional output growth shows that the "big freeze" in regions of southern and central China during late January and early February put a significant dent in industrial activity.
Implications	Although the short-term impact on a handful of regions has been severe, the disruption caused by these events is likely to be but a blip when industrial activity is viewed at the macro level. The inflationary consequences may, however, linger.
Outlook	With power and material supply channels restored in all but the most difficult to reach areas of the afflicted regions, output growth is likely to rebound robustly during the coming months, as enterprises catch up on orders and begin to rebuild damaged infrastructure and facilities.

The blizzard conditions that roared through regions of central and southern China in the last week of January and first weeks of February brought life to a near standstill in many areas. Six regions were identified at the time as "severe disaster areas": Hunan, Hubei, Guizhou, Guangxi, Jiangxi, and Anhui. At the time, reports from companies in these regions indicated that power supplies and supply chains had virtually been halted completely.

Looking at the most recent industrial output data below, Hubei, Anhui, and Guangxi managed to avoid the worst effects of this severe weather where industrial output is concerned. Industrial output growth in Hubei came in at 18.3% year-on-year (y/y) at the end of February, down by about five percentage points from 2007 growth levels. A similar case was reported from Guangxi, with factories in the region churning out 17.1% more output during February than a year earlier. Despite earlier concerns from anecdotal reports during February, output growth in Anhui remained strong, up by 23.4% y/y at the end of the month.

The other three regions in this grouping were hammered by the severe weather conditions. Guizhou, one of the poorest and least economically developed regions of the country reported a 20.7% y/y decline in output for the month of February, with the region having been the worst hit of all. Hunan, a region whose major industrial cities had been engines of growth during 2007, saw industrial output growth plummet to 3.4% y/y during the month. Manufactures in Jiangxi were also adversely affected, reporting an output growth rate of just 8.3% y/y.

It is also worth mentioning that key industrial and exporting regions that were not directly in the path of the storms also took a hit in terms of industrial output growth, as a combination of supply chain delays, an absent labour force, and energy concerns appear to have resulted in a slowdown to activity. Most notably, Guangdong and Zhejiang, and to a lesser extent Jiangsu, all reported significant slowdowns to output growth during the month. Given that these regions are China's largest exporters, this slowdown—assuming it is temporary—could show up in monthly trade figures. Other regions not directly in the path of these storms that experienced notable declines to output growth rates include Hainan, Yunnan, and Gansu. In some regions that were not affected, manufacturing activity appears to have jumped to compensate for losses elsewhere, especially where the production of energy and certain materials are concerned.

China: Regional Industrial Output Growth (Y/Y)
	February2008	2007
China National Total	15.4	18.5
Tier I Avg.	15.1	18.2
Beijing	6.1	13.4
Hebei	17.8	18.9
Tianjin	20.1	18.2
Liaoning	17.7	21.0
Shanghai	12.0	12.6
Jiangsu	13.8	18.9
Zhejiang	10.4	17.9
Fujian	21.2	21.5
Shandong	19.5	21.0
Guangdong	12.1	18.3
Tier II Avg.	17.1	24.5
Hainan	8.9	33.8
Jilin	23.6	23.6
Heilongjiang	18.2	15.8
Anhui	23.4	24.5
Jiangxi	8.3	24.6
Henan	22.8	24.2
Hunan	3.4	24.3
Hubei	18.3	23.6
Chongqing	17.2	25.1
Sichuan	26.6	25.4
Tier III Avg.	15.8	19.5
Inner Mongolia	28.8	30.0
Guangxi	17.1	26.5
Shanxi	20.5	21.0
Guizhou	-20.7	16.8
Yunnan	6.6	17.5
Tibet	26.1	15.2
Shaanxi	27.7	19.6
Gansu	9.1	17.1
Qinghai	24.7	18.4
Ningxia	16.6	17.0
Xinjiang	17.7	15.2
Source: NBS, Global Insight China Regional Service

Outlook and Implications

Those regions of the country identified as "severe disaster" regions comprised around just 14.5% of China's GDP in 2007, meaning that in broad macro terms the temporary impact on industrial activity in these areas will not make too much of a dent in the overall economic performance of the Chinese economy. Additionally, new sources of demand will be created by the need to rebuild infrastructure and facilities, as well as to restock supplies of everything from energy to raw materials.

In response to the blizzard, the central government quickly moved to boost supplies of credit and other key commodities to the hardest-hit regions to re-stimulate them. For this reason, output growth is likely to return to near trend levels seen during 2007 with a few months. However, one lingering effect during the first half of the year could be the inflationary consequences of damage to agricultural land and spring crops. Food price increases continue to drive decade-high consumer price inflation levels, and based on media reports and comments by public officials the damage to spring crops and agricultural land in many regions has been severe. The effects of this damage could linger, as in terms of agriculture, the six "severe disaster areas" accounted for 22% of total farming output in 2006.