Down, Not Out: Five Things to Know About China’s Power Crunch

Factory output growth in the world’s top energy consumer has dropped back to levels last seen in early 2020, when heavy COVID-19 curbs were in place.
Anderson Dong

Credit Research Analyst


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Blacked out homes, unlit streets, and factory shutdowns – China has been gripped by its worst power shortage in decades since mid-August, leading to electricity rationing in many provinces. Power cuts have disrupted many households and industries in the country, from the manufacturing hubs of Guangdong, Zhejiang and Jiangsu, to the northeastern rust belt provinces of Liaoning, Jilin and Heilongjiang.

Factory output growth in the world’s top energy consumer has dropped back to levels last seen in early 2020, when heavy COVID-19 curbs were in place.

Policy intervention from Beijing to address the coal shortage has managed to ease the power crunch since October, but the State Grid Corporation of China has warned that winter will still be a challenge and localised shortages are still a possibility.

It is not only, but also economic growth, which has already been challenged by recent property sector woes and government regulatory crackdowns. The nation’s gross domestic product (GDP) grew at its slowest pace in a year in 3Q 2021, expanding 4.9% from a year earlier and missing market forecasts. This is down from 7.9% growth in 2Q and 18.3% in 1Q, suggesting the Chinese recovery is weakening.

In a more adverse scenario, we estimate that the power crunch could drag China’s 4Q growth down by about 0.6 percentage points from our current baseline to 3.4%. However, we think the actual impact is likely to be less severe.

Here are five things to know about China’s energy crisis.

1. “Campaign-style” carbon and energy intensity reduction is the key driver.

The power outages have come at the same time as Beijing has increased the pressure on regional governments to reduce their carbon emissions in line with the country’s goal to be carbon-neutral by 2060. With the export-led post-COVID industrial boom causing power demand to surge, energy intensity (energy consumption per unit of GDP) only dropped 2% in 1H 2021, missing the government’s 3% target – thereby triggering this new wave of power rationing.

2. Coal supply shortages and surging prices are also at play.

Since 2016, China has been limiting new coal capacity, while raising production safety and environmental protection standards for existing mines. Coal supply and demand has largely been balanced, with coal demand growth at around 5% per year for the last five years according to our estimates. But supply – both production and imports – has struggled to keep up with the strong industrial recovery since 2020.

China’s long-term decarbonization plans, coupled with declining capex into new coal capacity globally due to environmental pressures, have reduced China and other countries’ contingent production capability when facing unforeseen demand surges.

Coal prices have soared as a result. With China’s government fixing electricity prices, most thermal generators are loss-making at current coal price levels, and thus have no incentive to increase supply.

3. The actual impact on the economy might be less severe than forecast.

Power rationing will likely remain a constraint for production and supply in the near term, but may not cause much additional damage should it meet weaker demand, which has already come from a slowing property sector and strict pandemic controls.

In addition, there appears to be room to ease the energy restrictions. Beijing has rolled out mitigating measures, such as fine-tuning policies on decarbonization, ramping up coal production, expediting new mine development, allowing more imports of foreign fuel, and increasing electricity pricing flexibility, especially for energy-intensive industries. Given these measures, we anticipate that we may see some relief to the power crunch by the end of 1Q 2022.

We believe industrial production growth could further moderate in 4Q 2021. In terms of inflation, we think the impact on China’s Consumer Price Index (CPI) may be capped due to weak demand from a slowing economy, but the Producer Price Index (PPI) could remain elevated. October’s PPI rose 13.5% from a year earlier, faster than the 10.7% increase in September, and the quickest pace since 1995.

We expect GDP growth to slow to about 5% in 2022 as the property sector and exports moderate, and thus energy control will no longer be a constraint. We also expect investments and exports to moderate, while the recovery of the less-energy intensive service sector should continue, which could help restore the energy supply-demand balance.

4. China’s carbon-reduction goals could have global implications.

If power outages persist, it could put a brake on China’s strong export momentum and further weigh on current supply chain disruptions. Even if Chinese exporters do not hike prices, it is expected that supply shortages would lead to higher retail prices and higher inflation in destination markets.

5. We are overall constructive on Asian commodity sector credits.

Our overall positive view on the Asian commodity sector stems from what we believe is our decent visibility into its financial performance over the next six months. We favour companies that would not only expect to benefit from high commodity prices, but also which we believe already have strong standalone credit profiles. Among key commodities, we are positive on steel, aluminium, and oil and gas. With crude steel production declining sharply, we are cautious on iron ore and coking coal.

Amid China’s increasing economic uncertainty and the potential ripples across the globe, investors may be inclined to take a more selective approach to their investments. We believe it’s an especially crucial time to be an active investor, as government policy and idiosyncratic risks drive further divergence between winners and losers.

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Down, Not Out: Five Things to Know About China’s Power Crunch