China Faces Another Economic Shock After Evergrande Crisis

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  • Almost half of China’s 23 provinces missed energy intensity targets set by Beijing and are now under pressure to curb power use.
  • China’s energy crisis is part of its own making as President Xi Jinping tries to ensure blue skies at the Winter Olympics
  • The economy is at risk of a severe shortage of coal and gas.

China may be diving headfirst into a power supply shock that could hit Asia’s largest economy hard just as the Evergrande crisis sends shockwaves through its financial system, says an article published in Bloomberg.  

About China’s Power Crunch

Almost half of China’s 23 provinces missed energy intensity targets set by Beijing and are now under pressure to curb power use. Among the worst-hit are Jiangsu, Zhejiang and Guangdong, a trio of industrial powerhouses that account for nearly a third of China’s economy.

China’s heating coal futures have more than quadrupled in the past month, smashing new records over and over as concerns over mine safety and pollution constrain domestic output while it continues to ban shipments from top supplier Australia. Meanwhile, natural gas prices from Europe to Asia have surged to seasonal highs as countries try to outbid each other for fast-depleting supplies.

In previous winter power surges in China, many have turned to diesel generators to plug the shortages of power from the electricity grid. This year, the danger is government policies have further limited the energy industry’s potential to increase production to meet the demand increase, said Zeng Hao, chief expert at consultancy Shanxi Jinzheng Energy.

Impact on economy

“With market attention now laser-focused on Evergrande and Beijing’s unprecedented curbs on the property sector, another major supply-side shock may have been underestimated or even missed,” Nomura Holding Inc. analysts including Ting Lu warned in a note, predicting China’s economy will shrink this quarter.

The worsening power crunch in China, perhaps overshadowed by the attention on whether Evergrande will default on its mammoth debts, reflects an extremely tight energy supply globally that’s already seen chaos engulf markets in Europe. 

The economic rebound from Covid lockdowns has boosted demand from households and businesses as lower investment by miners and drillers constrains production.

The economy is at risk of a severe shortage of coal and gas.

Reason for power restrictions

The crackdown on power consumption is being driven by rising demand for electricity and surging coal and gas prices as well as strict targets from Beijing to cut emissions. It’s coming first to the country’s mammoth manufacturing industries and factories are being ordered to curb activity or in some instances shut altogether. 

But China’s energy crisis is part of its own making as President Xi Jinping tries to ensure blue skies at the Winter Olympics in Beijing next February and show the international community he’s serious about decarbonizing the economy. 

Consequences of the power curbs

Yunnan Aluminum Co., a $9 billion producer of the metal used in everything from cars to soda cans, has curtailed output due to pressure from Beijing. The shock is also being felt in China’s giant food sector. Soybean crushers, which process the crop into edible oils and animal feed, were ordered to shut this week in the city of Tianjin.

In Jiangsu, a province near Shanghai with an economy almost as big as Canada’s, steel mills have closed and some cities are turning off street lights.

In nearby Zhejiang, about 160 energy-intensive companies including textiles firms were shuttered. While in Liaoning in the far north, 14 cities have ordered emergency power cuts that were blamed partly on the surging coal prices. 

“The power curbs will ripple through and impact global markets,” Nomura’s Ting said. “Very soon the global markets will feel the pinch of a shortage of supply from textiles, toys to machine parts.”

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Source: Bloomberg | Quint

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