China may be plunging head-first into an electricity supply shock that could hit Asia’s largest economy hard, just as the Evergrande crisis is sending 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 of all, there are the country’s gigantic manufacturing industries: from aluminum smelters to textile producers and soybean processing plants, factories are ordered to curb activity or, in some cases, shut down. completely.
Almost half of Chinese regions have failed to meet the energy consumption targets set by Beijing and are now under pressure to reduce their energy consumption. 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 Ting Lu, 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 lockdowns has boosted demand from households and businesses, as lower investment by miners and drillers limits production.
But China’s energy crisis is partly on his own initiative as President Xi Jinping tries to secure blue skies for the Beijing Winter Olympics next February and shows the international community he’s serious about it. subject of 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 thermal coal futures have surged over 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. This year, the danger is that government policies further limit the potential of the energy industry to increase production to meet increased demand, said Zeng Hao, chief expert at consultancy Shanxi Jinzheng Energy.
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 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.
âThe power outages will reverberate and impact global markets,â said Lu de Nomura. “Very soon, global markets will feel the pinch of a supply shortage of textiles, toys and 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 tightening poses a challenge for policymakers: how to pursue environmental goals without damaging the still fragile economies. Beijing is targeting 6% annual growth after expanding 12.7% 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 at Macquarie Group. âThe GDP 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. “