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Just as the Evergrande crisis sent shock waves in its financial system, China may be the first to be caught in an electricity supply shock, which may severely hit Asia’s largest economy.
Increasing demand for electricity, soaring coal and natural gas prices, and stringent emission reduction targets set by Beijing have promoted the blow to electricity consumption. It first appeared in the country’s huge manufacturing industry: from aluminum smelters to textile producers and soybean processing plants, factories were required to restrict activities or, in some cases, completely shut down.
Nearly half of China’s regions have not reached the energy consumption target set by Beijing and are now under pressure to restrict electricity use. The most affected are Jiangsu, Zhejiang and Guangdong-these three industrial powers account for nearly one-third of China’s economy.
Nomura Holdings analyst Lu Ting warned in a report: “As market attention is now focused on Evergrande and Beijing’s unprecedented containment of the real estate industry, another major supply-side shock may be underestimated or even missed.” shrink.
China’s increasingly severe power contraction—perhaps overshadowed by concerns about whether Evergrande will default on huge debts—reflects the extremely tight global energy supply and the chaos in the European market. The economic rebound caused by the Covid lockdown has boosted demand from households and businesses, as reduced investment by miners and drillers has restricted production.
But China’s energy crisis is partly caused by itself, because President Xi Jinping tried to ensure a blue sky at the Beijing Winter Olympics in February next year and showed the international community that he is serious about decarbonizing the economy.
This winter, the economy faces the risk of a severe shortage of coal and natural gas-used to heat homes and power plants. In the colder months before, it had to ration electricity, but it had never done so when the global price of these fuels reached current levels.
There are signs that the power crisis is beginning to affect households and businesses, and Guangdong Province urges residents to rely on natural light after some factories are cut off, and restrict the use of air conditioners.
Dazzling price
As concerns about mine safety and pollution limit domestic production, while continuing to ban shipments from top supplier Australia, China’s thermal coal futures have soared in the past month, setting record times. At the same time, natural gas prices from Europe to Asia have soared to seasonal highs, as countries compete for fast-draining supplies.
One reason behind the restriction on electricity consumption is that China hopes to reduce emissions in time for the Winter Olympics scheduled to be held in Beijing in February. [File: Qilai Shen/Bloomberg]During the previous peak periods of winter electricity consumption in China, many people turned to diesel generators to fill the grid power shortage. Zeng Hao, chief expert of Shanxi Jinzheng Energy Consulting Company, said that the danger this year is that government policies further restrict the energy industry’s potential to increase production to meet demand growth.
Yunnan Aluminum is a US$9 billion metal producer that uses everything from cars to soda cans. The company has cut production due to pressure from Beijing. China’s huge food industry has also felt the impact. The soybean crusher, which processes soybeans into edible oil and animal feed, was ordered to shut down in Tianjin this week.
According to Nikkei News, Apple and Tesla’s suppliers stopped production at some factories in China on Sunday. According to the report, Foxconn’s factories in Longhua, Guanlan, Taiyuan and Zhengzhou-the world’s largest iPhone manufacturing base-are still unaffected by power supply restrictions.
Many smaller companies have also begun to notify the stock exchange that they have been ordered to restrict or cease activities. Although they may be ignored by major foreign investors who do not include these companies, the end result may be a shortage of everything from textiles to electronic components, which may disrupt the supply chain and cannibalize the profits of many multinational companies.
In Jiangsu, a province close to Shanghai and an economy almost as large as Canada, steel mills have been closed, and some cities are turning off street lights. In nearby Zhejiang, about 160 energy-intensive companies, including textile companies, were shut down. In the far north, Liaoning, 14 cities have ordered emergency power outages, partly because of soaring coal prices.
“Electricity restrictions will affect the global market and affect the global market,” said Lu of Nomura Securities. “Soon, the global market will feel the pressure of shortages from textiles, toys to machine parts.”
For an economy facing multiple pressures after a V-shaped rebound in the past year, production cuts are a new threat. Like the energy turmoil in Europe, austerity poses a challenge for policymakers: how to achieve environmental goals without harming the still fragile economies. After an increase of 12.7% in the first half of the year, Beijing’s full-year growth target is 6%.
“Policy makers seem willing to accept the slowdown in growth for the remainder of this year in order to achieve carbon emissions targets,” said Larry Hu, head of China’s economics at Macquarie Group. “The goal of GDP exceeding 6% is easy to achieve, but given the strong growth in the first half of the year, the emission target is not easy to achieve.”
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