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China Power Crunch Is Next Economic Shock Beyond Evergrande

(Bloomberg) — China may be the first to plunge into a power supply shock that could hit Asia’s largest economy hard, just as the Evergrande crisis sends shockwaves through its financial system.

Most read by Bloomberg

The crackdown on power consumption is being driven by rising electricity demand and rising coal and gas prices, as well as Beijing’s strict targets to reduce emissions. It comes first for the country’s gargantuan manufacturing industries: from aluminum smelters to textile producers and soybean processing plants, factories are being ordered to curb activity or — in some cases — shut down altogether.

Nearly half of China’s 23 provinces have failed to meet the energy intensity targets set by Beijing and are now under pressure to cut power consumption. The worst affected are Jiangsu, Zhejiang and Guangdong, a trio of industrial powers that account for almost a third of the Chinese 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 at Nomura Holding Inc., including Ting Lu, warned in a statement. a note, in which they forecast the Chinese economy. will shrink this quarter.

The worsening power crisis in China – perhaps overshadowed by the focus on whether Evergrande will default on its massive debt – reflects extremely tight energy supplies worldwide, the chaos of which has already engulfed markets in Europe. The economic recovery from Covid lockdowns has boosted demand from households and businesses as lower investment by miners and drillers limits production.

But China’s energy crisis is partly its own cause, as President Xi Jinping tries to ensure blue skies at the Beijing Winter Olympics next February and shows the international community that he is serious about decarbonising the economy. .

Story continues

See also: How China’s fight against pollution rages on raw materials: QuickTake

The economy is in danger of running into a serious shortage of coal and gas this winter, which are used to heat homes and power plants. It has had to ration power in the colder months before, but it has never had to make do with the global prices of these fuels at the level they are now.

Dazzling prices

China’s heating coal futures have more than quadrupled in the past month, continuing to break new records as concerns over mine safety and pollution limit domestic production, while top supplier Australia continues to ban transport. Meanwhile, natural gas prices from Europe to Asia have risen to seasonal highs as countries try to outbid each other for rapidly depleting supplies.

During previous winter power surges in China, many have turned to diesel generators to fill the grid’s power shortages. There is a danger this year that government policy has further limited the energy industry’s potential to increase production to meet rising demand, said Zeng Hao, chief expert at consultancy Shanxi Jinzheng Energy.

Yunnan Aluminum Co., a $9 billion producer of the metal used in everything from cars to soda cans, has curtailed production under pressure from Beijing. The shock is also being felt in China’s giant food sector. In the city of Tianjin, the soybean crushers that process the crop into edible oils and animal feed had to close this week.

According to Nikkei, suppliers of Apple Inc. and Tesla Inc. production at some of their locations in China halted on Sunday. Foxconn’s facilities in Longhua, Guanlan, Taiyuan and Zhengzhou — the world’s largest iPhone manufacturing complex — were unaffected by the power supply restrictions, the report said.

A number of smaller companies are also beginning to inform the exchange that they have been ordered to curb or shut down the activity. While they may be overlooked by major foreign investors who fail to back these companies, the end result could be a shortage of everything from textiles to electronic components that could disrupt supply chains and eat up the profits of many multinational companies.

See also: Beijing puts pressure on Chinese manufacturing hub to curb power consumption

In Jiangsu, a province near Shanghai with an economy nearly as big as Canada’s, steel mills have closed and some cities are turning off streetlights. In nearby Zhejiang, about 160 energy-intensive businesses, including textile companies, were closed. While in Liaoning, in the far north, 14 cities have ordered emergency power cuts, partly due to rising coal prices.

“The surges will continue to affect global markets,” Nomura’s Ting said. “Very soon, world markets will feel the pinch of a shortage of supply from textiles, toys to machine parts.”

The curtailments pose a new threat to an economy that is under multiple pressures after a V-shaped recovery over the past year. And as with the energy crisis in Europe, the tightness poses a challenge to policy makers: how to pursue environmental goals without harming the still fragile economies. Beijing is targeting 6% growth for the full year, after growing 12.7% in the first half.

“Policymakers seem willing to accept slower growth for the rest of this year to meet the carbon emissions target,” said Larry Hu, China chief economics officer at Macquarie Group. “The GDP target of more than 6% is easily achievable, but emissions targets are not easy to meet given the robust growth in the first half.”

(Adds report from Nikkei in 11th paragraph)

Most read from Bloomberg Businessweek

©2020 Bloomberg LP

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