Macroeconomy

Energy disruption adds to China’s growth headwinds

As well as suggesting that China’s road to carbon neutrality could be bumpy, the recent power crunch there could add to global inflationary pressure.

Dong Chen and Ling Chen, Pictet Wealth Manaement

Energy disruption adds to China’s growth headwinds

Recently, many parts of China have experienced a shortage of electricity. Local governments have had to resort to rationing, cutting power supplies to industrial companies during peak hours. In a few extreme cases, acute power shortages have even led to city-wide blackouts. 

Power shortages in China started to appear in early 2021 but have spread recently. Several factors have contributed to this situation: 1) a surge in industrial demand for electricity due to strong exports; 2) a shortage of coal, partly due to government regulations and a reduction in coal imports; and 3) as China transits to a greener economy, the intrinsically volatile nature of renewable energies. 

Facing mounting concerns about heating needs ahead of winter, the government has issued a number of measures to ensure sufficient energy supplies for residential needs. The authorities have approved new coal mines and restarted some shuttered mines in Inner Mongolia, while urging power plants to increase their coal inventories.

Other factors are at place that could ease the situation. The aggressive measures imposed by local governments to reduce carbon emissions have likely reduced electricity demand. In addition, with the property market cooling, construction activity is set to moderate in the next few months. The resulting fall in electricity use could help ease some of the strains on the system. 

But there has been damage to growth. Indeed, the official manufacturing purchasing managers’ index (PMI) in China came in at 49.6 in September, down from 50.1 in August. This is the first time this gauge has fallen into contraction territory since February 2020. As the survey likely was conducted before the power crunch really hit at the end of September, the latest PMI reading probably does not fully reflect the slowdown in economic activity. 

Energy disruption in China may add to global inflationary pressure. Rising electricity prices and sharp falls in the production of some raw materials (such as steel) will likely lead to further rises in prices, which, in turn, will boost the producer price inflation (PPI) even higher, which reached 9.5% y-o-y in August. While the rise in producer prices has seeped into consumer inflation in China only to a limited extent so far (due to muted domestic demand), the surge in Chinese PPI is clearly being exported to the rest of the world. The latest power crunch will likely add to already high global inflation pressure, at least in the short term. 

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