China drought to test policymakers on inflation management

Boats are seen stranding on crackled bed of the Chirui Lake in Shiping County, southwest China's Yunnan Province, March 24, 2010. The sustaining severe drought ravaged this region since last October and made no harvest of crops. (Xinhua/Hu Yanhui)

by Xinhua writers Jiang Tingting, Ma Shukun in Beijing and Cheng Qun in Nanning

BEIJING, March 26 (Xinhua) -- The current drought in southwest China that has threatened grain production in the region would not have a major impact on national food prices, experts said, but added that the risk of inflation may rise if the drought spreads further.

The lingering drought that began autumn last year has resulted in enormous economic losses and a decline in grain production in Yunnan, Guizhou, Sichuan provinces, Guangxi Zhuang Autonomous Region and Chongqing municipality, and has ignited market concerns of soaring food prices and inflation.

However, experts dismissed such worries, saying China had abundant food reserves and southwest China was not the country's major grain production area.

"National food prices are unlikely to soar as grain output in the regions is mainly for their own consumption and only accounted for 15 percent of the country's total," said Zheng Fengtian, deputy dean of the School of Agricultural Economics and Rural Development of Renmin University.

As of Tuesday, the drought had affected 96.54 million Mu (about 6.44 million hectares) of arable land in the five regions, said the State Flood Control and Drought Relief Headquarters. As of the end of 2008, China had about 1.83 billion Mu of arable land.

A local farmer looks at dying crop in the field in Shihuitang village of Shiping County, southwest China's Yunnan Province, March 24, 2010. The sustaining severe drought ravaged this region since last October and made no harvest of crops. (Xinhua/Hu Yanhui)

China was hit by drought every year and history proved regional drought would only result in an imbalance between supply and demand and the temporary price fluctuation in that particular region, said Huang Dejun, chief analyst for Beijing Orient Agribusiness Consultant Ltd, a consulting firm specializing in agribusiness.

"I don't expect the drought to have much impact on rice prices," he added.

The National Development and Reform Commission said Tuesday that the consumer price index (CPI), the main gauge of inflation would see a "moderate increase" in the first quarter, which was expected to be between 2 to 2.5 percent from a year earlier.

In February, China's CPI rose 2.7 percent from a year earlier, the highest in 16 months, and also neared the three percent full year target limit set by the government.

Premier Wen Jiabao told reporters on March 14 that managing inflation expectations was a crucial task apart from maintaining economic growth and promoting economic restructuring in 2010, the year Wen described as "the most complicated year" for the country's economy.

Wen noted agriculture was the life-line of the national economy, and its role in ensuring economic growth and managing inflation.

"But if the drought spreads into the major grain producing areas including the provinces of Hubei, Hunan and Jiangxi, it will create upward pressures on prices and push up inflation expectations," Huang remarked.

It might complicate the macro economic control for Chinese policy makers this year, he said.

Huang said harvests of sugarcane, rapeseed, tea would be affected as they were grown in the southwest regions, but their CPI weight was too small to have any meaningful impact.

It was estimated the national sugarcane output would drop 13 percent year on year because of the drought. But given the big decrease in international sugarcane prices, domestic output reduction would likely have limited impact on the prices, according to Thursday's Economic Information Daily.

Zheng Fengtian said the southwestern region had plentiful rainfall of about 1300 mm every year. The government should increase investment on irrigation infrastructure for water conservancy to safeguard against drought, he said.