Shockwaves from the Evergrande crisis could lead to energy shock in China, as the financial system of Asia’s largest economy jostles.
A surge in coal and gas prices fueled by Beijing’s strict regulation to cut emissions has shot up the demand for electricity as the power consumption crackdown continues. The first in line for damage are the manufacturing industries. Everything, from aluminium to textile to soybean, will be affected as factories reduce activity or shut down.
Chinese Economy To Shrink?
Half of China is under pressure to reduce power consumption as they missed the Government’s emission targets. Regions like Jiangsu, Guangdong, Zhejiang – the biggest industrial powerhouses of the country are under fire. Together these 3 contribute a third of China’s economic activity.
Analysts predict that the country’s economy might shrink this quarter as the real estate curbs continue over the Evergrande issue. Most think that China has underestimated or miscalculated this supply chain shock.
Ambitious Energy Plan To Blame?
The situation shows the reality of the tight global energy supply where Evergrande’s fall is causing chaos in markets across regions, especially in Europe. While demands have gone up from households and businesses as the covid lockdown eased, a low number of drillers and miners is affecting production.
However, most of it is due to China’s ambitious clean energy plan ahead of the Winter Olympics in Beijing. The crisis is fueled by Beijing’s urge to show the world that the country’s air quality is good and the skies are blue and how they are adopting decarbonizing measures.
Earlier, they had rationed power in colder months, but the situation is worse now with the rising coal and gas prices. They are at risk of coal and gas shortage which is crucial for heating homes in the winter and running factories.
Already the effect has started in Guandong with people switching to natural light and limiting air-conditioner to usage while factories are cutting power.
Industries Shutting Down To Meet Energy Targets
In the last month, thermal coal prices in China soared while domestic output suffered over pollution issues and supplies from Australia remained banned. Meanwhile, countries are trying to outbid each other to get natural gas supplies which are fast depleting. This has shot up natural gas prices everywhere.
Last year during similar power surges, many Chinese people resorted to diesel generators, but it has become tenser with new government policies.
The food industry is also reeling under the effect as many soybean crushers shut down last week to fulfil the energy target. These soybean plants make edible oils and animal feed from the crop.
Big companies like Apple, Tesla etc., have stopped production on Sunday. Many have already informed the stock exchange that they are halting activity as directed by the Government. Ultimately, this could lead to a mass shortage of all kinds of commodities. From textiles to food to electronic equipment, everything will be short in supply. This is likely to have a significant impact on the MNCs.
The situation is so dire that many cities in the Jiangsu province have turned off street lights and closed down their steel mills. The economy of Jiangsu is of the same size as Canada. In neighbouring Zhejiang province, 160 energy-intensive companies have shut down. This includes textiles and powerplants. 14 cities in Liaoning in the far north has declared emergency power cuts.
Global Shortage Likely
Many analysts feel that these power curbs will ultimately affect the global market as production goes down for everything. They expect a shortage of textiles, toys and machine parts in the upcoming months.
Lesson for Policymakers
This is a lesson for global policymakers as they seek to meet environmental targets, but their energy demands deter them as it would affect production and ultimately affecting the fragile economy. China has a target of 6% full-year growth after the first half of this year showed 12.7% growth.
Many analysts feel that policymakers in China are okay with a slow growth rate in Q4 to meet emission targets. They think a 6% GDP is easy to meet than the emission targets.