BEIJING: China may be diving head first into a power supply shock that could hit Asia’s largest economy hard just as the Evergrande crisis sends shockwaves through its financial system.
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: from aluminum smelters to textiles producers and soybean processing plants, factories are being ordered to curb activity or – in some instances – shut altogether.
Almost half of China’s regions missed energy consumption 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.
“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 extremely tight energy supply globally that’s already seen chaos engulf markets in Europe.
The economic rebound from Covid-19 lockdowns has boosted demand from households and businesses as lower investment by miners and drillers constrains production.
But China’s energy crisis is partially 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 de-carbonising the economy.
The economy is at risk of a severe shortage of coal and gas used to heat homes and power factories this winter. It’s had to ration power in the colder months before but it’s never had to do it with global prices of these fuels at the levels they are now.
China’s thermal coal futures have surged 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. — Bloomberg