Trade dictates that China feels at least a twinge of Japan's pain

The wide impact on manufacturing in Japan indicates the risks involved in having a small supplier base.

It was only a few hours after the devastating earthquake and tsunami hit Japan on March 11 that commentators in east Asia were starting to speculate about what the economic impact would be.

The early predictions were the cost of the disaster would be about US$10 billion (Dh36.72bn), and Japan's economy, while suffering from reduced growth rates for a few months, would pick up in the second half of this year as reconstruction efforts got into gear.

The suggestions of recovery are still being made but the early guesses of how much reconstruction could cost have been vastly overshadowed by later estimates, which have put the price as high as $310bn - and that is before the effects of the nuclear crisis are added.

While less dramatic, the economic effects in Japan's neighbour China, which last year displaced the Land of the Rising Sun as the world's second-largest economy, are significant.

Last year, Japan absorbed 8 per cent of China's exports, while about 13 per cent of China's imports came from its neighbour.

Experts indicate it is difficult to predict how China's economy will be affected, as various factors could work against one another.

A major concern has been with joint ventures between Japan and China in the car industry, as parts from parent companies are likely to run short because of factory shutdowns in Japan.

Analysts have predicted car makers in other parts of Asia, including South Korea and Thailand, could suffer in the same way, and Toyota has announced it is suspending production in North American plants due to shortages of parts.

There have been jumps in the price of Japanese cameras in China due to panic buying sparked by fears of future price rises. Chinese-assembled electronics goods that use parts from Japan are also likely to cost more as shortages bite.

Just as China has seen some manufacturing shifted to other countries with lower wage levels, recent events could provide another reason international companies may want to spread manufacturing into a more diverse range of countries.

The wide impact on manufacturing in Japan indicates, some have said, the risks involved in having a small supplier base.

Yet some Chinese manufacturers could benefit from the situation in Japan, suggests Frank Song, a professor of economics at the University of Hong Kong's School of Economics.

"In the short run, because there's disruption to Japan's electronics and automobile industries, there could be opportunities for Chinese companies to fill the gap," Prof Song says.

Chinese construction companies could also benefit by securing contracts to rebuild damaged parts of Japan, he says.

The effects on inflation in China are various. Several analysts believe demand in Japan will push up commodity prices, adding to the economy's significant inflation problem.

"There's a great need [in China] for similar materials as Japan will need when Japan rebuilds the country," Prof Song says.

"If you have higher commodity prices, this will create inflationary pressure in China."

Concerns over high inflation and overheating have been acute in China in recent months and the central bank has moved to cool the economy by raising interest rates and bank reserve ratios, the latter having been increased several times since last October.

While commodity price rises may be a concern, another effect of Japan's crisis could aid attempts to prevent overheating, says Ren Xianfang, an analyst in Beijing with IHS Global Insight.

"When Japan starts reconstruction there will be huge demand," Ms Ren says. "Some of the liquidity that's flowed to China could flow back to Japan."

Excessive liquidity has been considered a key factor behind inflationary pressures and the creation of asset bubbles in China, so a cut in liquidity could ease these concerns.

"But we don't know how much money comes from Japan," Ms Ren says. "We never know the exact impact."