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Why China’s energy disaster is such a giant deal


A general view shows the Wujing coal-fired power plant in Shanghai on September 28, 2021.

Hector Retamal | AFP | Getty Images

BEIJING – Local Chinese authorities have abruptly ordered power cuts in many factories over the past week, reflecting a system that seeks to respond to a range of Beijing directives and macroeconomic developments.

While some economists have lowered their forecasts for China’s GDP growth as a result, others are still waiting to see the magnitude of the impact.

Here’s a rough look at how the Power Crunch went:

Coal supply falls, prices rise

In late 2020, China stopped buying coal from Australia, once the Asian giant’s largest import coal source. Political tensions between the two countries have escalated after Australia backed an investigation into Beijing’s handling of the coronavirus pandemic.

Meanwhile, the historically cold weather that winter drove up demand for coal. Some cities have reportedly reduced electricity consumption in homes and factories.

In addition to a global rise in commodity prices, prices for thermal coal, the main fuel for generating electricity, rose more than 40% in 12 months to around 777 yuan per ton (119.53) in December 2020 on the Zhengzhou Commodity Exchange, data from Wind Information .

Renewable energies are falling

But when China tried to switch to renewable energies, the hydropower center in Yunnan Province was hit by a severe drought. According to the National Development and Reform Commission, electricity from hydropower fell by more than 4% every month in July and August compared to the previous year.

Wind power has also slowed its growth, increasing 7% year over year in August, up from 25.4% in July, the commission said.

Analysts also say China’s climate targets in the latest five-year plan are more moderate than expected. Climate Action Tracker, an international non-profit organization that reviews countries’ efforts to achieve the goals of the Paris Agreement, rated China’s policies and actions as “inadequate” in a report released on September 15.

Most of China’s electricity is still generated from coal. According to data accessed through wind, year-over-year growth in electricity consumption has risen to its highest level in a decade.

Read more about clean energy from CNBC Pro

Electricity rationing begins

In addition to extreme temperatures, factories are demanding more electricity as they rush to fulfill global orders for Chinese goods. Exports rose double digits amid the pandemic.

“Demand for electricity has increased with China’s economic recovery,” wrote Eurasia Group analysts in May. They noted that “several industrial centers along China’s east coast, including Guangdong, Zhejiang, Jiangsu and Shandong, have warned of possible temporary electricity shortages during the peak summer season.”

In June, the state-sponsored Securities Times reported some power restraints in parts of the Guangdong export center.

Meanwhile, coal supplies declined as mines closed to reduce CO2 emissions. According to wind data, the coal stocks of the large power plants reached a ten-year low in August.

But in mid-August, China’s economic planning agency announced that 20 regions – which account for about 70% of China’s GDP per nomura – are failing to meet carbon-related targets, prompting local authorities to act.

Some authorities turn off the electricity overnight

Some of the last steps were quite abrupt. For example, the management of a high-tech business area in Hunan Province ordered electricity restrictions with immediate effect on September 23, according to a copy from CNBC. The curbs are said to last until Thursday, the day before the Chinese national holiday from October 1st to 7th.

On Sunday, the state-backed Securities Times reported major blackouts to factories at Guangdong’s manufacturing center in Dongguang City for the same week. The report also found sudden blackouts in many parts of northeast China, including residential areas in Liaoning Province.

“The power outage means that products cannot be delivered on time,” said Wen Biao, general manager at Qianhe Technology Logistics Co. in Shenzhen, Guangdong Province. The situation is similar in Shanghai and the port city of Ningbo.

The decline in production has cut overseas demand and prices for shipping to the U.S. west coast have fallen from $ 15,000 to $ 9,000 per container, he said, noting the decline began on September 24th.

In total, Reuters reported that more than 10 provinces and regions have restricted electricity consumption.

For comparison: Guangdong Province accounts for around 23% of Chinese exports by values, while Liaoning accounts for 1.6% according to official figures for January to August.

Read more about China from CNBC Pro

The abrupt power outages have also given foreign companies a pause on whether to invest more in supply chains based in China. Some companies that had planned to invest tens of millions of dollars in China are now looking to Southeast Asia instead, said Johan Annell, partner at consulting firm Asia Perspective.

This week, China’s State Grid and National Development and Reform Commission pledged to secure electricity supplies, especially for residents, and said they would take steps such as increasing coal production and increasing coal imports.

The commission said electricity demand this winter could surpass the peaks seen last summer and winter.

Steam coal prices have nearly doubled this year, trading a little more than 1% at around 1,319.80 yuan per ton on Thursday lunchtime.

Economic impact

The shock for many Chinese factories comes as investors worry about the impact of the massive real estate sector as indebted real estate giant Evergrande warns of default. Together with related industries like construction, real estate accounts for around a quarter of China’s GDP, according to Moody’s.

After about two decades of rapid, debt-driven expansion in the industry, regulators have put in place stricter rules on how much developers can borrow.

Regarding the economic impact, Dan Wang, chief economist at Hang Seng China in Shanghai, said she would “focus more on restrictive policies on the real estate market.”

She attributed the electricity limits mainly to the inability of the authorities to adjust the electricity price, which is largely set by the state. Wang said factories’ rush to meet global demand has also created overcapacity.

“The impact of the power restriction is akin to a natural disaster,” she said.

Some economists expect a bigger impact. Among the major investment banks, Nomura lowered its GDP forecast for China on Friday, followed by Goldman Sachs on Tuesday.

“The blackouts alone may not be significant enough, but when combined with the slowdown in the real estate sector and regional Covid outbreaks, they make me more concerned about fourth quarter GDP growth,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “I’ve cut my forecast for the fourth quarter from 5% to around 4%, with the risk on the downside.”

Economists from other financial institutions have mostly held back with forecast cuts and are waiting to see how strong the decline in production will be.

Growth is also weighed down when major Internet technology companies are cracked down on allegedly monopoly practices. A sudden order in July for after-school tutoring companies to reorganize into nonprofits has put hundreds of thousands of jobs – and incomes – in question.

Consumer spending, a major engine of China’s economic growth, has also been sluggish since the pandemic, as Covid-related restrictions have deterred many people from traveling and eating out.