China may first plunge into an energy supply shock that could hit Asia’s largest economy hard, just as the Evergrande crisis sent shock waves through its financial system.
The crackdown on energy consumption is being driven by rising demand for electricity, rising coal and gas prices, as well as tough targets from Beijing to cut emissions. It comes first in the country’s giant manufacturing industries: from aluminum smelters to textile producers and soybean processing plants, factories are being ordered to limit activity or – in some cases – shut down entirely.
Nearly half of China’s regions have failed to meet the energy consumption targets set by Beijing and are now under pressure to reduce energy use. Among the hardest hit are Jiangsu, Zhejiang and Guangdong – three industrial powers that account for nearly a third of China’s economy.
Nomura Holding Inc analysts including Ting Lu warned in a note: “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.” This quarter will shrink.
China’s deepening energy crisis—perhaps overshadowed by concern over whether Evergrande will default on its massive debt—reflects the extremely limited energy supply globally that has already seen chaos engulfing markets in Europe. The economic recovery from the Covid lockdowns has boosted demand from households and businesses as lower investment by miners and diggers has constrained production.
But China’s energy crisis is partly of its own making, with President Xi Jinping trying to ensure blue skies at the Beijing Winter Olympics next February and showing the international community that he is serious about decarbonizing the economy.
The economy is at risk of severe shortages of coal and gas – used to heat homes and power plants – this winter. It should have rationed energy in the colder months before that, but it has never had to do so with global prices for these fuels at the levels they are now.
There are indications that the electricity crisis is starting to affect homes and businesses alike, as Guangdong Province has urged residents to rely on natural light and reduce the use of air conditioners, after cutting off electricity to some factories.
Eye drain prices
China’s thermal coal futures surged in the last month, setting records again and again, as concerns about mine safety and pollution constrain domestic production while it continues to ban shipments from Australia’s largest supplier. Meanwhile, natural gas prices from Europe to Asia have soared to seasonal highs as countries try to outbid each other for rapidly depleting supplies.
In the sudden surge in power the previous winter in China, many turned to diesel generators to plug power shortages from the power grid. The risk this year is that government policies have limited the power industry’s ability to ramp up production to meet increased demand, said Zeng Hao, chief expert at Shanxi Jincheng Energy Consulting.
Yunnan Aluminum, a $9 billion producer of metals used in everything from cars to soda cans, has curtailed production due to pressure from Beijing. The food giant’s food sector in China has also been shocked. Soybean crushers, which process the crop into edible oils and animal feed, were ordered to shut down this week in the city of Tianjin.
According to Nikkei, suppliers of Apple Inc. and Tesla Inc. Production at some of their locations in China on Sunday. The report said Foxconn’s facilities in Longhua, Guanlan, Taiwan and Zhengzhou – the world’s largest iPhone manufacturing complex – were not affected by power supply restrictions.
A number of smaller companies have also begun notifying the exchange, which has received orders to curb or halt activity. While it may be overlooked by large foreign investors who do not cover these companies, the end result could be a shortage of everything from textiles to electronics components that can disrupt supply chains and hurt the profits of a host of multinational companies.
In Jiangsu, a province near Shanghai with an economy nearly as large as Canada, steel plants have closed and some cities have turned off their street lights. In neighboring Zhejiang Province, about 160 energy-intensive enterprises including textile enterprises have closed. While in Liaoning in the far north, 14 cities ordered emergency power cuts, which were partly blamed on soaring coal prices.
“Energy constraints will spread and affect global markets,” Lou Nomura said. “Soon global markets will feel the tightness of supplies from textiles and toys to machine parts.”
Downsizing is a new threat to the economy, which is facing multiple stresses after a V-shaped rebound last year. And, as with Europe’s energy turmoil, this pressure poses a challenge to policymakers: how to pursue environmental goals without harming still-fragile economies. Beijing is targeting full-year growth of 6% after expanding 12.7% in the first half.
“Policy makers seem willing to accept slower growth for the rest of this year in order to meet the carbon emissions target,” said Larry Hu, Macquarie Group’s head of China economics. “The GDP target of more than 6% can be easily achieved, but the emissions targets are not easy to achieve given the strong growth in the first half.”