How will Japan’s disaster affect China?

Beijing has frozen approval of new nuclear power projects after the disaster in Japan. Short-term, this could hit a big bond issue planned by the China National Nuclear Corp. But China’s need to diversify from coal mans that its long-term plan for major development of its nuclear power sector as laid out in the new Five Year Plan, is unlikely to be derailed. The proviso to this, of course, is that China does not suffer any radiation effect from the affected plants.

More immediately, the disaster has a number of short-term effects on China:

1. Companies in eastern China that supply food to Japan are reporting sharply increased demand from Japanese customers normally supplied from the area affected by the earthquake and tsunami. Some firms in Zhejiang are ramping up sales across the sea to Japan. Customs offices are working overtime. The increased exports will increase marginal pressure on domestic supply (at least in regional terms) which is already the main cause of food inflation.

2. In Shenzhen, IT equipment companies which use components imported from Japan are reporting shortages – some depend on suppliers in the disaster area and operate on just-in-time deliveries. Flash chip prices are rising. Japanese auto companies operating in China also face difficulties supplying essential parts that are typically sent from Japan.

3. Disruption of the supply chain out of Japan for both finished goods and components is likely to boost Chinese competitors in IT equipment and to fortify domestic and joint venture car makers against Japanese brands.

4. Putting aside political friction, China has shown itself anxious to offer assistance with relief efforts. If Tokyo goes out to borrow more money, Beijing could be the lender of first resort. That would have positive regional implications reaching beyond the immediate financial impact.