- China is facing a power squeeze from a shortage of coal supplies
- Some property shares, hit hard by the Evergrande crisis, have started to bounce back
China’s power supply crunch, which has shut factories across the country, may pose a much bigger threat to the economy than the debt crisis at Evergrande Group, reports Reuters.
The power curbs
China is facing a power squeeze from a shortage of coal supplies, tougher emissions standards and strong demand from manufacturers and industry that have triggered widespread curbs on usage.
Twenty provinces have implemented power cuts since mid-August, including the manufacturing hubs of Guangdong, Zhejiang and Jiangsu, putting pressure on companies’ earnings.
Factories have stopped operations due to power shortages and government mandates to meet energy and carbon reduction goals.
Yuan Yuwei, hedge fund manager at Water Wisdom Asset Management. said the electricity outages would break the supply-demand equilibrium, dealing a direct blow to consumption and the real economy. “The fallout is more likely to be out of control,” Yuan said.
Yuan’s current investment stance is to bet on hydropower companies such as SDIC Power Holdings and Sichuan Chuantou Energy Co, while shorting steelmakers and coal-fired power makers.
Consequences
Goldman Sachs and Nomura have revised down projections for Chinese economic growth this year.
Few investors have been tempted to go bargain-hunting among companies hit by the power shortage, fearing the situation could deteriorate further.
Yang Tingwu, vice general manager of hedge fund house Tongheng Investment said he now prefers companies with few factories, as China’s curbs on energy and carbon emissions “is bad news for the overall economy in the near term.”
Production of steel, aluminium and cement, as well as infrastructure construction, would be immediately affected by the power cuts and supply restrictions, Morgan Stanley analysts wrote in a report published on Monday, adding the impact could ripple downstream to hit more sectors such as shipping and automobiles.
Evergrande crisis
Investors believe the potential scale of the problems could dwarf any fallout from liquidity troubles at property developer Evergrande, with liabilities of $305 billion, that roiled property stocks and bonds this month.
“The Evergrande crisis has been unfolding for quite some time, and I think the risks will be defused in a targeted way,” said Yuan Yuwei, hedge fund manager at Water Wisdom Asset Management.
Impact on stock market
Some property shares, hit hard by the Evergrande crisis, have started to bounce back, as some investors bet the market has over-reacted.
“We have been underweight in developers, but have been gradually buying into this weakness,” said Rob Mumford, Hong Kong-based investment manager at GAM Investments. “There are clearly distressed valuations for companies that are not in distress currently.”
An index of Hong Kong-listed mainland China property stocks added 6.4% on Tuesday, after hitting its lowest level in over four years last week, while an index of Shanghai listed real estate stocks also gained 3% on Tuesday.
Central Bank’s Statement
The rally came after China’s central bank vowed to protect consumers exposed to the housing market, without mentioning Evergrande in a statement posted to its website on Monday, and injected more cash into the banking system. An index tracking non-ferrous metal makers is down 15% this month.
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Source: Reuters
