American investment banking giant Goldman Sachs has slashed its growth forecast by 2% in 2021 to 7.8% in the wake of power cuts in Northeastern China. The power outages in China have resulted in a halt to production at various factories. Some of these factories supply crucial produce to technology giants like Tesla and Apple. Goldman Sachs says that this production vacuum has negatively impacted around 44% of China’s industrial output.
In a note, Goldman Sachs stated that the cuts in industrial output have contributed to “significant downside pressures”. Consequently, the bank has revised its expectations for the Chinese economy to grow at 4.8% and 3.2% in the third and fourth quarters of the current year instead of the 5.1% and 4.1% forecasted previously.
The bank has warned of “both upside and downside risks relating principally to the government’s approach to managing the Evergrande stresses, the strictness of environmental target enforcement and the degree of policy easing”.
An analyst at Goldman said, in addition to “other major economic risks, resulting from the Evergrande debt crisis, measures to reduce coal-related emissions and reduced imports have affected supply levels, contributing to a sharp rise in energy prices”.
In line with the Goldman Sachs move, other major US financial sector players have also revised their estimates pertaining to China’s economic growth due to concerns over the ongoing energy crisis as well as the probability of a debt default triggered by the Evergrande fiasco.
S&P Global Ratings said that the uncertainty developing because of the ongoing situation in Beijing “will affect the economic growth prospects of the whole Asia-Pacific”.
The Chief Economist at S&P Global Ratings Paul Gruenwald said, “The growing risk relates to the growth path in China”. Commenting on the impact of the resurgence of COVID-19, he added that it has “weakened the economic outlook for the region”.
A Beijing friendly media house the Global Times reported that the restrictions on energy production “caused by many factors including a sharp increase in coal prices and the increase in question, they have led to side effects of all kinds in Chinese factories, with a reduction or complete stop of production.”
The newspaper Insiders predicts that the current situation “could worsen as the winter season approaches”, with Chinese authorities “launching new measures, including a crackdown on coal prices, to ensure constant electricity supply “.
Power cuts loom over growth
Electricity shortage has affected industrial production in the world’s second-largest economy. Unimicron Technology — supplier to Apple— reported that in a filing submitted on Monday to the Taiwan Stock Exchange, factories in two regions were asked to halt production starting from midday Sunday till Thursday.
Based on the figure of 44% estimated by Goldman Sachs, the energy crisis could cause a 1-percentage-point drop in annualized GDP growth during the third quarter, followed by a 2-percentage-point decline during the last quarter of the year.
Almost 60% of China’s economy is powered using coal. The electricity crisis has occurred in the wake of disruptions to coal supplies caused by the pandemic and a trade falling-out with Australia.
It is not surprising that coal prices have shot through the roof in China as it experiences a shortage of coal supplies, stricter greenhouse gas emissions standards as well as strong demand from industry.
An analyst at China Neican, a think-tank, Adam Ni, said as electricity prices remain capped in the country, local authorities had no choice but to resort to rationing.
He added, “So with rising input prices but fixed output prices, generating electricity has become less profitable – it may even become a loss-making venture,”. “Since raising electricity prices may lead to more social discontent than rationing electricity, especially among households, the authorities have opted to restrict demand for electricity through rationing.”
Another major reason for the restrictions imposed is authorities’ plans to meet provincial targets set to achieve a reduction in energy consumption, Ni added. He emphasized that Beijing planned to hit peak emissions before 2030 as well as carbon neutrality by 2060.
Power outages
The power cuts have not only triggered factory shutdowns but also plunged millions of homes in Northeastern China into darkness. Reasons for the “unexpected” and “unprecedented” power cuts in the provinces of Jilin, Liaoning and Heilongjiang were reported by the Communist Party-owned tabloid, Global Times to have been caused by power rationing during peak hours.
The rationing was initiated on Thursday in the midst of coal shortages without issuing any advanced warning. Global Times reported that the power outages have sparked public anger while shutting down traffic lights and 3G mobile phone coverage in a few areas.
To worsen the situation, a utility in Jilin warned that the power shortages could lead to disruption in water supplies at any time. CCTV reported that a factory in Liaoning had to rush 23 workers to the hospital as the ventilators stopped working due to the blackout causing carbon monoxide poisoning.
One of the many frustrated users from Liaoning wrote on Weibo, a Chinese microblogging site. “Power cuts eight times a day, four days in a row… I’m speechless,”.
Citizens also complained that malls were shutting early and a convenience store was using candlelight.
“It’s like living in North Korea,” wrote another user.
No energy crisis
The Global Times reported that despite the concerns raised due to the energy crisis, industry insiders were of the opinion that “China’s energy supply capacity is so far adequate for meeting demand and that China has no energy crisis”.
The China Electricity Council, representing the country’s power suppliers, said on Monday that power companies that use coal as their primary source of generation are now “expanding their procurement channels at any cost” for the purpose of providing heat and electricity supplies in winters.
It added that the country needs to work on raising the production and supply of coal while guaranteeing environmental protection and safety. Power plant inventories need to be increased ahead of winter through more medium- and long-term contracts.
However, coal traders expressed concerns that finding new import sources has become increasingly difficult. A northeast China-based trader said “Russia has to first meet demand from Europe, Japan and South Korea,” adding “Indonesia’s export shipments have been curbed by rainy weather the last couple of months and Mongolia’s exports, mostly by trucks, are small.”
A senior research fellow at the Centre for China and Globalization described the blackouts as a “short-term cyclical problem” and expressed hope that the Chinese government will be able to step in and fix the issue.
“In the northeast of China it can get bitterly cold and as winter comes on, ensuring adequate heat and electricity for the people there is a top priority,” he explained. “If we look at the COVID-19 pandemic, I think we can glean some insights into how things might proceed, in that what China has done is to put human life first. And of course, this has brought some economic cost and some inconvenience. But this shows the priorities of the government. And we see something similar here – the priority is making sure that people are able to stay safe, to stay warm and then to mitigate as much as possible the short-term disruptions.”
