The economics of natural disasters

Chinese Central Bank

Photo Credit: Xinhua

To respond more efficiently to rebuilding efforts and humanitarian missions, the Chinese central bank is lowering its reserve requirements and lending standards in an effort to push new investment into infrastructure in the areas rattled by the earthquake. Though China has faced serious issues with controlling domestic inflation, it will have to reconsider its attempts to reign in the money supply to boost the rebuilding effort.

New lending requirements

Economically, the natural disasters that shook China are likely to send inflation even higher. Loans are being approved without 100% documentation due to earthquake losses, while repayments are being delayed by months. What this creates is a larger money supply and more money flowing to big builders and independent contractors , instead of emergency work needed to rebuild from a catastrophic earthquake.

High inflation, outperforming markets

For the investor, this likely means higher inflation, as well as a boost to the markets. China has attempted to slow inflation, but will have to inflate as a means of rebuilding yet again. For the investor, the markets will likely absorb even more capital, and the stock market is likely to rise due to new government contracts. The worry investors hold about the market falling due to the costs of rebuilding is negated by the input of fresh credit to keep the system moving, as well as to provide for the common welfare of the people.

If there was ever a bottom on which to capitalize, this is it. Even with the slight jump in the Shanghai index due to the rise in PetroChina prices, the markets are still near their bottoms. The Chinese markets faced an unfair and irrational sell off due to losses that will occur on just one quarter. After the rebuilding takes place, we’re going to see business as usual with an even more inflated money supply. If we can learn anything from this, it is that the new money will flow to the markets immediately after it makes it to the people. Go long here; inflation will peak and push prices both in resources and the stock markets to new levels.