Qingdao It is not uncommon for industrial companies in the People’s Republic to experience short-term electricity bottlenecks in China. But in the past few weeks there has been such a shortage in large parts of the country that more and more analysts are expecting this to affect the growth of the world’s second largest economy.
Since August there has been a significant reduction in electricity supply in more than 20 provinces. Factories were shut down, particularly in the economically strong south and north-east of the country; Residents sat in the dark for hours, even traffic lights and elevators were switched off for hours because there was no electricity.
At the beginning of the week, Apple and Tesla suppliers reported production outages, but the local German economy is also affected. “The bottlenecks in the power supply have spread again in the past few days,” says Stefan Gätzner, chief representative of the Federation of German Industries (BDI) in Beijing.
German companies are affected by the power outages to different degrees. “Some of the electricity was turned off for several hours, others had to interrupt their production for several days,” says Gätzner.
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Basically, one already understands the measures, said Jens Hildebrandt, managing director of the German Chamber of Commerce in China, the ARD radio. But there is no understanding of how they are implemented. This is because the companies are sometimes informed of this only a few hours before the shutdown.
Analysts revise growth forecasts
The first analysts lowered their growth forecasts for China due to the worsening situation in the electricity supply this week. After the Japanese investment bank Nomura, the US bank Goldman Sachs also lowered its expectations. For this year, the bank no longer expects 8.2 percent, as before, but only 7.8 percent growth.
The official industrial purchasing managers’ index (PMI) for September will be released on Thursday. “We expect a sharp decline in purchasing managers’ indices for manufacturing and growth in industrial production in September, largely due to draconian measures by local governments to reduce energy consumption and energy intensity, as well as widespread power outages due to coal shortages,” it said in a recent analysis by Nomura.
The problems with the power supply come at a time when China’s growth is already being affected by major upheavals in the real estate sector. China’s second largest real estate company Evergrande is in crisis.
Observers see two main factors as the reason for the widespread power outages: On the one hand, the price of coal in China has risen sharply in recent months. According to observers, this is also due to the fact that the People’s Republic is no longer importing coal from the country, which was previously very important for the supply, due to political tensions with Australia.
The rise in coal prices, combined with the coal shortage, has reduced the availability of thermal power plants, says Yan Qin, a coal expert at the Refinitiv analysis company. “Due to the doubling of coal prices and the unchanged electricity tariff, coal-fired power plants make losses per generated kilowatt hour.”
Another reason, according to experts, is the strict energy saving requirements of the Chinese leadership. Some provinces have ordered industry to cut power production in the second half of September in order to meet the end-of-year energy targets, Qin said.
China’s rapid rise to the second largest economy in the world is based on huge amounts of cheap coal electricity, which is driving growth in many places. In 2019, the share of coal-fired electricity in primary energy generation was around 70 percent. The generation of electricity from coal is one of the main reasons why China is the world leader in terms of emissions of climate-damaging gases.
But that should change. About a year ago, China’s head of state and party leader Xi Jinping announced that the People’s Republic wanted to become climate neutral before 2060 and promised that carbon dioxide emissions would peak before 2030. The energy efficiency targets are part of the plan for how Beijing intends to achieve this goal.
German economy fears price increases
The German economy is concerned that the bottlenecks in the power supply will have domino effects. “In particular, energy-intensive industries such as cement, aluminum and steel producers have to stop their production again and again,” said BDI China representative Gätzner. “This will lead to price increases or even delivery bottlenecks, especially in the area of raw materials.”
The crisis in the power supply is also fueling concerns that chip production, which is already suffering from bottlenecks, could be impaired again. So far, however, analysts have not seen this on a larger scale.
More: Example of Evergrande: Beijing is taking a high risk with it.