Five Things To Know About China’s Electricity Shortage
#3: The real impact on the Chinese economy may be less severe than expected.
Since mid-August 2021, China is experiencing its worst power shortage in decades. Many homes are plunged into darkness, many streets are not lit, and many factories had to be closed. The situation is such that electricity rationing has been implemented in many provinces of China.
From the manufacturing centers of Guangdong, Zhejiang, and Jiangsu to the northeastern rustbelt provinces of Liaoning, Jilin, and Heilongjiang, the power outages have disrupted many homes and industries across the country. Industrial production growth in the world's largest energy consumer has fallen back to levels last seen in early 2020 when heavy COVID-19 restrictions were in place.
Beijing's policy intervention to address the coal shortage has helped ease the power shortage since October, but the State Grid Corporation of China has warned that winter will remain problematic and localized shortages are still possible.
While China's energy security is at stake, there is a much bigger concern for Beijing, as the country's economic growth, already challenged by the recent difficulties in the real estate sector and the government's regulatory measures, is now under serious threat.
The country's gross domestic product (GDP) grew at its slowest pace in a year in the third quarter of 2021, rising 4.9% year-on-year, below market expectations. This is a drag from the 7.9% growth in the second quarter and 18.3% in the first quarter, suggesting that China's recovery is slowing.
In a more unfavorable scenario, experts estimate that the energy shortage could cause China's fourth-quarter growth to decline by about 0.6 percentage points from the current base case of 3.4%. However, the actual impact is likely to be less severe.
To better understand the ins and outs of this Chinese energy crisis, I propose to detail the 5 key elements to consider.
1. The main driver is government pressure to reduce carbon and energy intensity
The power outages came as Beijing increased pressure on regional governments to reduce their carbon emissions, in line with the country's goal of achieving carbon neutrality by 2060.
With the export-led post-COVID industrial boom driving electricity demand through the roof, energy intensity (energy consumption per unit of GDP) fell by only 2% in the first half of 2021, missing the government's 3% target - triggering this new wave of power rationing.
2. Coal supply shortages and soaring prices are also at play
New coal production capacity has been limited in China since 2016, while the government continues to raise production safety and environmental protection standards for existing mines. Until 2020, coal supply and demand have been largely in balance, with coal demand growth of about 5% per year over the past five years. But supply, both production and imports, has struggled to keep up with the strong industrial recovery since 2020.
China's long-term decarbonization plans, coupled with declining investment in new coal capacity globally due to environmental pressures, have reduced the ability of China and other countries to meet unanticipated demand surges.
As a result, coal prices have soared. With the Chinese government setting electricity prices, most thermal generators are running deficits at current price levels and therefore have no incentive to increase supply.
3. The real impact on the Chinese economy may be less severe than expected
In the short term, electricity rationing is certain to remain a constraint on generation and supply. But it may not cause further damage due to weaker demand, which can already be seen with the housing downturn and COVID-related restrictions.
Moreover, it appears that there is room to reduce these tensions. Beijing has implemented easing measures with:
Adjusting decarbonization policies.
Increasing coal production.
Accelerating the development of new mines.
Allowing more foreign fuel imports.
Increasing the flexibility of electricity prices, especially for energy-intensive industries.
With these measures, the electricity shortage could be alleviated by the end of the first quarter of 2022. Industrial production growth could also slow down further in Q4 2021. In terms of inflation, experts believe that the impact on China's consumer price index (CPI) may be limited due to weak demand from the slowing economy, but the producer price index (PPI) may remain high. October's PPI rose 13.5% from a year earlier, faster than the 10.7% increase in September, and the fastest pace since 1995.
All indications are that China's GDP growth is expected to slow to around 5% in 2022, due to a moderation in the real estate sector and exports, and thus to energy restrictions no longer being as restrictive. Investment and exports are also expected to slow, while the recovery of the less energy-intensive service sector is expected to continue, which could help restore the balance between energy supply and demand.
4. China's carbon reduction targets could have global implications
If power outages persist, this could dampen China's strong export momentum and further weigh on the current supply chain disruptions. Even if Chinese exporters do not raise prices, supply shortages can be expected to lead to higher retail prices and inflation in destination markets.
5. Experts are generally positive on Asian commodity credit stocks
Experts have a generally positive view of the Asian commodities sector. This is due to the good visibility of China's financial performance over the next six months. Investors should focus on companies that not only expect to benefit from high commodity prices but also already have strong stand-alone credit profiles.
Among the major commodities, optimism is high for steel, aluminum, oil, and gas. With steel production down sharply, it is best to be cautious about steel ore and coking coal.
With growing uncertainty in China and potential repercussions around the world, investors are well-advised to take a more selective approach to their investments. This is a particularly crucial time to be an active investor, as China's government policy and idiosyncratic risks will greatly increase the divergence between winners and losers.
Some reading
Discover How a Transaction Is Added to the Bitcoin Blockchain and Secured via Mining in 9 Steps. Understanding the fundamentals of Bitcoin is essential.
The Day Klay Thompson Broke the NBA Record for Points in a Quarter With the Warriors. 37 points that made Klay Thompson change dimension.
If You Want Certainty, Hold On to Your USD Which Will Continue To Fall. Otherwise, Buy Bitcoin. The guarantees that the Bitcoin protocol gives you are more important than its short-term price.
You Can’t Change Your Past With Bitcoin, but You Can Still Change Your Future for the Better. Take action and seize the opportunity.
This Man Lost 7,500 BTC 8 Years Ago by Throwing Away His HDD – Here Is the Lesson To Be Learned. With great power comes great responsibility.