HONG KONG (BLOOMBERG) – China could plunge headlong into a power supply shock that could hit Asia’s largest economy hard, just as the Evergrande crisis sends shockwaves through its financial system.
The crackdown on electricity consumption is driven by growing demand for electricity and skyrocketing coal and gas prices, as well as Beijing’s strict targets to cut emissions. First, there are the country’s gigantic manufacturing industries: from aluminum smelters to textile producers and soybean processing factories, factories are ordered to reduce activity or, in some cases, shut down. completely.
Nearly half of China’s 23 provinces have failed to meet Beijing’s energy intensity targets and are now under pressure to reduce their electricity use. Among those most affected are Jiangsu, Zhejiang and Guangdong – a trio of industrial powers that make up nearly a third of China’s economy.
“With market attention now focused on Evergrande and Beijing’s unprecedented restrictions on the real estate sector, another major supply-side shock may have been underestimated or even missed,” analysts warned. of Nomura Holding, including Lu Ting, in a note, predicting that the Chinese economy would contract. this trimester.
China’s worsening electricity crisis – perhaps overshadowed by attention to the possibility of Evergrande defaulting on its gigantic debts – reflects an extremely tight global energy supply that has already seen chaos invade European markets.
The economic rebound from Covid-19 lockdowns has boosted demand from households and businesses as declining investments by miners and drillers limit production. But China’s energy crisis is partly on his own as Chinese President Xi Jinping tries to secure blue skies for the Beijing Winter Olympics next February and shows the international community he’s serious. on the decarbonization of the economy.
The economy is threatened by a severe shortage of coal and gas – used to heat homes and power plants – this winter. He had to ration electricity during the previous colder months, but he never had to do so with the world prices of these fuels at the levels they are now.
China’s heating coal futures have more than quadrupled in the past month, repeatedly breaking new records as concerns over mine safety and pollution limit domestic production as it continues to ban shipments from the main Australian supplier. Meanwhile, natural gas prices from Europe to Asia have hit seasonal highs as countries try to outbid each other for rapidly depleting supplies.
In previous winter surges in China, many turned to diesel generators to fill power shortages in the power grid. The year, the danger is that government policies have further limited the potential of the energy industry to increase production to meet increased demand, said Zeng Hao, chief expert of Shanxi Jinzheng Energy.
Yunnan Aluminum, a producer of $ 9 billion (S $ 12.2 billion) of metal used in everything from cars to soft drink cans, has cut production due to pressure from Beijing. The shock is also being felt in the Chinese food giant. Soybean crushers, which process the crop into edible oils and animal feed, were ordered to close this week in Tianjin City.
According to Nikkei, suppliers to Apple and Tesla halted production at some of their sites in China on Sunday. Foxconn’s facilities in Longhua, Guanlan, Taiyuan and Zhengzhou – the world’s largest iPhone manufacturing complex – have not been affected by the power supply restrictions, according to the report.
A number of small businesses are also starting to notify the stock market that they have been ordered to curb or shut down. While they may be overlooked by major foreign investors who don’t cover these companies, the end result could be a shortage of everything from textiles to electronic components, which could scold supply chains and eat away at profits from a business. multitude of multinational companies.
In Jiangsu, a province near Shanghai with an economy almost as large as Canada’s, steel mills have closed and some cities are putting out street lights. In neighboring Zhejiang, around 160 energy-intensive businesses, including textile companies, have been closed. While in Liaoning, in the far north, 14 cities ordered emergency power cuts, attributed in part to soaring coal prices.
“Power outages will reverberate and impact global markets,” said Dr Ting of Nomura. “Very soon, global markets will feel the pinch of a supply shortage of textiles, from toys to machine parts.”
The cuts pose a new threat to an economy facing multiple pressures after a V-shaped rebound over the past year.
And as with Europe’s energy cuts, the squeeze poses a challenge for policymakers: how to pursue environmental goals without damaging the still fragile economies. Beijing is targeting 6 percent annual growth after expanding 12.7 percent in the first half of the year. “Policymakers appear ready to accept slower growth for the rest of the year in order to meet the carbon emissions target,” said Larry Hu, head of the Chinese economy for the Macquarie Group.
“The GDP (gross domestic product) target of over 6% is easily achievable, but emissions targets are not easy to meet given the robust growth in the first half of the year.”