May 31, 2011


Drought hits 5% of China's cropland, sparks inflation fears


The drought in the middle and lower reaches of the Yangtze River has already affected 104 million mu (about 6.96 million hectares) of cropland, which accounts for slightly over 5% of China's total farmland, according to the State Flood Control and Drought Relief Headquarters.


The drought has been most severe in Hubei, Hunan, Jiangxi, Anhui and Jiangsu provinces, where the afflicted farmland accounts for 43% of the drought-hit farmland of China.


The national meteorological centre has already provided an estimate that the drought has caused direct economic losses of almost RMB15 billion (US$2.3 billion) in the middle and lower reaches of the Yangtze River.


More worryingly, the drought has already caused gyration in prices for vegetables, aquatic products and grains in the drought-hit regions as well as neighbouring provinces.


For instance, in Guangzhou city, the provincial capital of Guangdong, prices for rice have been climbing steadily since April, as Guangdong heavily relies on rice imports from Hubei, Hunan and Jiangxi.


Prices for aquatic products such as shrimp reportedly recorded a near 30% increase in Hubei province as output was wiped out by half by the drought. In the meantime, vegetable prices have rebounded since mid-May, also attributable to the severe drought.


While food prices in China recorded a marginal retreat in April, the supply shock from the latest drought is bringing in additional pressures for inflation and is likely to push up food price inflation again.


Indeed, current risks to China's inflation mainly come from supply side uncertainties, such as global commodity prices and domestic food price shocks. As growth has already started decelerating, demand-side pressure has been dissipating, which, combined with more favourable base effects that will emerge in the next two months, may lead to easing inflation in the second half, although supply-side shocks could prolong such inflation cycles to a certain extent.

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