China’s ongoing power shortage underscores the daunting challenges of balancing conceptual ideals and execution difficulties.  The confluence of factors leading to the shortage phenomon is complicated consisting of political, diplomatic, institutional and economic factors. 

Causes 

1. Institutional factors: Role in managing Global Climate Change

China announced at the United Nations on September 21^st to target achieving carbon emissions to peak by 2030 and carbon neutrality by 2060.  The move is welcomed internationally as the country accounted for around 28% carbon dioxide emissions globally.

Prior to the UN convention,  China had promised to cut energy intensity – the amount of energy consumed per unit of economic growth – by 3% in 2021 to meet its climate targets. Provincial authorities stepped up enforcement in recent months because only 10 out of 30 mainland regions could cut energy intesnity in the first half of 2021. 

2. Amendment of Article 134/Anti-corruption campaign in coal producing region 

Article 134 in China’s criminal law elevated penalties for a series of violations from fines to possible jail time in response to an increase in mining-related accidents. This also led to more safety inspections by authority. This law somewhat led to reluctance amongst miners to boost production.

Even before the amendment of the law, anti-corruption campaign was intensive in major coal-producing regions, spanning from Inner Mongolia (top coal producer in China), Shannxi, and Shanxi.  This affected region accounted for 76.4% of domestic coal production.

As a result, coal production growth has stalled. Output was up 27.1% year over year for the first two months, but plunged to 5.5% YoY YTD in August.  Meanwhile, surging thermal power demand was up 14% YTD, depleting coal inventories and drove price up to record high.  On the other hand, electricity prices are administered by the state, which cannot respond in real time to changing demand/supply balance.  Against such backdrop, surging coal prices hampers incentive to produce as they are making losses. 

Impact and solutions

1. Production disruptions to hit GDP growth 

China’s current power crunch is affecting about 20 provinces and regions, representing over 66% of its gross domestic product.  Electricity use in 1H21 jumped 16.2%, far exceeding the GDP growth rate of 12.7%. Disruptions on the producer side will translate into slower industrial activities before subsequently hitting exports. More than 100 companies have notified the stock exchanges regarding product suspension. The impact is likely to intensify as weather gets cold in 4Q20. 

2. Acceptance of higher inflation ahead 

As a result, the authority is likely to accept higher inflation by raising electricity prices. Guangdong province is raising electricity prices as much as 25% during peak-demand hours.  Peak hours are from 11am-noon and 3pm-5pm – a total of three hours every day. Price of thermal coal, which accounts for two thirds of the nation’s electricity mix, up 88% YTD to about RMB1,400 a ton. In fact, PPI of mining and quarrying rose by 41.8% YoY in Aug, with major commodity prices in China are now 40-60% up from the pre-COVID level. Higher electricity prices may help reducing demand thereby easing power-supply shortage. The price hike, however, applies only to industrial users, rather than households. As a result, upstream profits are boosted by production cut. Downstream industries suffered. The industrial profits growth of coal industry stay elevated at 145.3% YoY YTD, while that of textile and garment slowed to single-digit. 

3. Relax the informal embargo on coal imports from Australia 

Given the sudden positive turn of Sino-US relationship, there is hope that tension between China and Australia will deflate in tandem. Before China-Australia relationship turned sour, around 25% of China coal imports came from Australia.  That plunged to zero in the first eight months of this year, compared with 70m tonnes imported last year in the same period. To offset the supply shortage, imports from Indonesia and Russia respectively increased by 19.6mn and 14.2mn tonnes. However, this is adequate given domestic coal production cannot make the shortfall up given prevailing institutional factors are fixed and can’t be reversed quickly. 

 Solutions are likely consist of accepting higher electricity prices borne mostly by producers alongside speeding up the clearance of Australia coal imports at Chinese ports. As far as the duration is concerned, it will probably last until the winter is passed.  That will impact growth momentum primarily in 4Q20 (4.9% YoY according to our Nowcasting model) and partially in 1Q21.  

We cannot rule out there will be similar cases to be happened in other sectors in the foreseeable future. There are contradicting forces working within a complex system going through transitional changes.  A benevolent cause may not always lead to intended outcome.  However, history suggests China’s learning curve is a steep one.

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Chris Leung

Chief China Economist - China & Hong Kong 首席中國經濟學家 - 中國及香港

chrisleung@dbs.com