China On Ice

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The Inflation Factor
Storm-related economic problems are likely to be temporary, but they are still worrisome because the nation is already facing the possibility of reduced growth if the U.S. slumps into a recession. In China, "risks to growth also inevitably mean risks to [social] stability," says Patrick Horgan, China managing director for Washington, D.C.-based consultants APCO Worldwide. "On a big scale like this, it's no longer just about the weather but about the ability of the government to govern." And if you had to pick one area of the economy that scares the authorities in China the most it would have to be inflation, which hits citizens where it hurts most — in the wallet. The country's consumer price index hit an 11-year high of 6.5% in October due largely to rising food and fuel costs. The storms will almost certainly cause another spike. Frigid temperatures across 14 provinces in China are destroying vegetable crops and will "push up food prices further in January and February," says Jun Ma, chief China economist at Deutsche Bank in Hong Kong. The consequences could be serious, says Simpfendorfer of the Royal Bank of Scotland. "Even if [inflation] creeps up to 7.5%, that grabs the headlines and will affect expectations."

There have been no reports of protests, but consumers are testy. On Jan. 29, Zhang Liying, a 36-year-old mother of one, shuffled into the supermarket near her apartment outside Shanghai, knocked snow off of her boots and started shopping for dinner. Bundled up against bitter temperatures, she had ridden her scooter to the store and was "frozen now," she said. But when Zhang got to the vegetable section, you could practically see the steam coming from her ears. Half a kilo of greens now cost 1.09 renminbi (about 15¢). "Before the snow, a week ago, it was only 0.59 renminbi!" she said. "How can that be?"

The government has imposed price controls on some goods to keep inflation in check, but such policies may be making matters worse. For example, Beijing imposed price controls on utilities in early 2006, stabilizing electricity rates. But at the same time the price of coal, used to generate some 80% of the country's electricity, was left to be set by market forces. With coal prices rising, some power companies curtailed purchases because their profit margins were being squeezed and they were unable to compensate by hiking rates. With reduced stockpiles, the utilities were unable to generate enough electricity when the cold snap hit and power demand soared — and transport disruptions made it difficult or impossible to replenish supplies. Official media say plants that produce 10% of China's power are now reduced to less than three days of coal reserves. To cope with the problem, authorities have banned exports of coal mined in China and diverted shipments bound for factories to power plants. A more lasting solution — allowing utilities to pass on at least part of the price rises to consumers in order to reduce demand — simply isn't an option now because of the political sensitivity of inflation.

Damage Control
Government officials — perhaps mindful of the criticism that was heaped on U.S. President George W. Bush's Administration after it was slow to react to the 2005 Hurricane Katrina disaster — are keenly aware of the importance of managing China's big freeze. "This government has made competence a cornerstone of their administration even more than their predecessors," says Horgan, the APCO consultant. So the state propaganda machine has been working flat out to show how officials are trying to ease the crisis. The main China Central Television channel regularly airs a special program called "Battling the Blizzard." An often repeated news clip shows Premier Wen Jiabao picking up a bullhorn and apologizing to a crowd of disgruntled travelers trapped in the train station in Changsha, the icy capital of Hunan province. (Even the Premier was inconvenienced by the weather: his plane couldn't land in Changsha and was forced to divert to Wuhan, 180 miles away. Wen arrived in the capital by train.) "I'm very sorry that you are stranded and not able to go home earlier," Wen told the throng. "We are doing our best to fix things so that you will all be home."

With tens of millions still on the road and forecasts predicting more bad weather, Wen may have committed the political sin of overpromising. But one political sin can often be expunged by another: deflecting the blame. A news clip airing on state television features an interview with a young migrant worker who insists loudly — and to the beaming approval of the collected cadres — that the crisis is "a natural disaster, not caused by administrative or leadership problems." True enough, but in a country where the public is constantly reminded of the omnipotence of the central government, some citizens may not be easily convinced that China's top leaders are not somehow responsible for the weather, too.