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Explained: China’s power crisis and how it could be a bigger economic blow than Evergrande

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Goldman Sachs and Nomura have revised down projections for Chinese economic growth this year following the crisis. Shares in Chinese chemical producers, carmakers and shipping companies have tumbled, while renewable energy stocks have soared.

Explained: China’s power crisis and how it could be a bigger economic blow than Evergrande
China is facing a power crisis due to coal supply shortages. The surge in demand for energy from manufacturers, industries and domestic users has pushed coal prices to record highs, making matters worse. This unusual demand for coal has prompted the government to impose curbs on usage.
At the same time, the debt crisis at Evergrande Group has investors worried. The second-largest property developer of China, the Evergrande Group is struggling to fund its $300-billion liabilities.
The second-largest economy of the world is grappling with a double whammy on the economic front – real estate giant Evergrande’s debt crisis and now countrywide factory shutdowns on the back of the power crunch. Experts blame the shortage of coal supplies and tougher emission norms for the crisis.
Meanwhile, Goldman Sachs and Nomura have revised down projections for Chinese economic growth this year following the crisis. Shares in Chinese chemical producers, carmakers and shipping companies have tumbled, while renewable energy stocks have soared, reported Reuters.
China has been fighting with fluctuating power prices and usage restrictions since last March. Authorities have been ordering manufacturers to curb usage so that they could meet the energy use targets across the country. Manufacturers in Guangdong were approached with such requests in May this year to curb consumption.
China’s energy use targets
China is world’s top producer of CO2 and other pollutants and Chinese efforts to reduce greenhouse emissions is an important step in tackling climate change.
Xi Jinping, while talking at a UN summit in 2020, promised that the country would cut carbon emission per unit of its GDP.
Xi also pledged the adoption of renewable energy as an alternative while also stating that the carbon intensity would be cut by more than 65 percent from its 2005 levels within 2030. Local authorities are now playing a key role in ensuring that the targets are really met.
China’s National Development Reform Commission (NDRC) statistics show that the targets have not been met in at least 20 provinces in first half of 2021. NDRC in September had announced tougher punishments for those who failed to meet the targets.
Interestingly China’s power generation through August 2021 was 15 percent higher than in the same period in 2019 but higher power generation also led to release of higher toxic gases.
How are regions limiting power for certain users?
Around 20 provinces have imposed power cuts and curbs on electricity use since mid-August. This has severely impacted the earnings of the companies, businesses and industrial establishments.
In provinces like Zheijiang, Jiangsu, Yunnan and Guangdon, local governments have asked industries to curb output or limit power usage. Some have been asked to send notices to heavy users to even halt production while others have been asked to shut shop until further notice. As a result, high-power consuming industries like aluminium smelting, steel making and cement manufacturing have been hit hard.
China’s reaction to power shortage
Chinese authorities have said they would work to resolve the problem but have not explained what steps would be taken. Global shortage of natural gas and Beijing’s ongoing trade dispute with Australia has exacerbated the scenario in China.
Bigger crisis than Evergrande
According to Reuters, investors apprehend that the potential scale of the power crisis could dwarf any fallout from liquidity troubles at Evergrande, which has led to a sharp fall in property stocks and bonds this month.
Market experts fear that the shutdown of factories and plants following electricity outages would break the supply-demand equilibrium, dealing a direct blow to consumption and hence adversely affect the economy, the Reuters report added.
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