Sunday, January 16

China’s energy crisis is the next economic shock after Evergrande


China may be diving headfirst into an energy supply crisis that could hit Asia’s largest economy hard just as the Evergrande crisis sends shockwaves through its financial system.

The crackdown on energy consumption is being driven by rising demand for electricity and rising coal and gas prices, as well as Beijing’s strict targets to cut emissions. It hits the country’s gigantic manufacturing industries first: From aluminum smelters to textile producers to soy processing plants, factories are being ordered to reduce activity or, in some cases, shut down entirely.

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Almost half of China’s regions failed to meet energy consumption targets set by Beijing and are now under pressure to curb energy use. Among the hardest hit 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 real estate, another major supply-side shock may have been underestimated or even overlooked,” warned analysts at Nomura Holding Inc. , including Ting Lu, in a note, predicting China’s economy. will shrink this quarter.

The worsening energy crisis in China, perhaps overshadowed by attention to whether Evergrande will default on its huge debts, reflects an extremely tight energy supply globally that has already seen chaos in Europe’s markets. The economic rebound from Covid shutdowns has boosted demand from homes and businesses as lower investment from miners and drillers limits production.

But China’s energy crisis is partly caused by itself, as President Xi Jinping tries to ensure a blue sky at the Winter Olympics in Beijing next February and shows the international community that he is serious about decarbonizing China. the economy.

The economy is at risk of severe shortages of coal and gas, which are used to heat homes and power factories, this winter. It has had to ration energy in the colder months before, but it has never had to with global prices for these fuels at current levels.

There are signs that the energy crisis is beginning to affect both homes and businesses, with Guandong province urging residents to rely on natural light and limit their use of air conditioning, after cutting power in some factories.

Dazzling prices

China’s thermal coal futures have skyrocketed in the past month, repeatedly setting records as concerns about mine safety and pollution limit domestic production as it continues to ban shipments from top supplier Australia. Meanwhile, natural gas prices from Europe to Asia have risen to seasonal highs as countries try to outbid each other for rapidly depleting supplies.

In previous winter power surges in China, many have turned to diesel generators to fill power shortages on the electrical grid. This year, the danger is that government policies have further limited the power industry’s potential to increase production to meet increased demand, said Zeng Hao, chief expert at consulting firm Shanxi Jinzheng Energy.

Yunnan Aluminum Co., a $ 9 billion producer of the metal used in everything from cars to soda cans, has cut production due to pressure from Beijing. The impact 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 down this week in Tianjin city.

According to Nikkei, suppliers to Apple Inc. and Tesla Inc. 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, were unaffected by power supply restrictions, according to the report.

Several smaller companies are also beginning to report to the stock market that they have been ordered to halt or halt activity. 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 that could tangle supply chains and consume the profits of a host of multinational companies.

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, around 160 energy-intensive companies, including textile companies, closed down. While in Liaoning, in the far north, 14 cities ordered emergency power outages that were attributed in part to rising coal prices.

“Electricity restrictions will spread and impact global markets,” said Lu de Nomura. “Very soon, global markets will feel the impact of a supply shortage, from textiles, toys to machine parts.”

The cuts are a new threat to an economy facing multiple pressures after a V-shaped rally last year. And as with Europe’s energy crises, the contraction poses a challenge for policy makers: how to pursue environmental goals without damaging still fragile economies. Beijing is targeting 6% annual growth after a 12.7% expansion in the first half.

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

© 2021 Bloomberg


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