Dear fellow China watchers,
When I was growing up it was common to hear the UK’s economic ills being attributed to contagion from across the Pond: “When America sneezes, we catch a cold”. True, it was an easy way for British policy makers to escape the blame, but there was also a lot to it given the US’s relative economic dominance.
Today, when China sneezes the world catches a virus… although, given what happened with Covid, this might not be the imagery that Beijing wants to promote, even if it is a backhanded compliment.
Nonetheless the sentiment is correct. Given that China is the major trade partner for 140+ countries and a global investor, what happens inside the People’s Republic has ramifications for us all.
Today I’m going to discuss the power outages that are sweeping China right now, causing all sorts of economic disruption, and which serve as a timely reminder of the complexity behind the country’s economic and political issues.
As always please feel free to comment, like and share. Many thanks for reading - and I’ll be back on Saturday for more from the History of China.
It has become quite clear recently that China’s economy, for so long the standard bearer of global growth, is slowing. Much of the economic headwinds the country faces are structural in nature, such as the reduction in the workforce (100 million will be gone by the end of this decade). Then there is the reconditioning of the economy to reduce the power of some of the more dominant sectors, like tech, and real estate (which has led in part to the Evergrande crisis, as I wrote about here).
Over the last few months another economic gale has appeared in the form of power outages. In provinces across the country, factories have been forced to shut down because of a lack of electricity, adding to the travails of the nation’s businesses and homes. Whilst blackouts are relatively common in China, the scale of the recent outages have been far in excess of normal. What is also different is that these outages are often officially sanctioned, and even officially organised, by a government seemingly intent on economic self-harm.
This is important for the rest of the world to understand for two reasons.
First, is that these power problems have been the final straw for analysts despairing of China’s economic woes (even if these troughs are healthier than the peaks of most other countries). Over the last few weeks, Western banks and institutions have been slashing the China’s expected growth forecasts, with Goldman Sachs, for example, forecasting zero quarter-on-quarter growth. With Chinese demand a major global driver, this will have an impact on many a foreign economy.
Second, the outages add to the generally downward trend in business confidence in China. Tech manufacturers in particular - including Western ones of note - are looking at decreasing their exposure to the country, and plans are being looked at to shift operations to other countries, like Vietnam and Indonesia.
Dig into the reasons behind the power outages, and it becomes clear that those with a sinking confidence in China have some reason to be right.
The official, most cited reasons for the outages are simple: a surge in energy use, and a shortage of coal.
According to official statistics, electricity consumption from January to August increased fourteen percent compared to the same period last year. This is down to China – and its factories’ customers across the world - getting back to pre-Covid levels of economic activity on the run up to Christmas.
Unfortunately, this surge comes at a bad time for energy supply, which has been hit by a number of blows.
Number one is the effort by the government to reduce emissions ahead of the COP26 climate talks set to be held in the UK next month. China’s big push around the world depends on good publicity, which is hard to find climate-wise when it is the world’s biggest carbon emitter by far: China's energy-related carbon emission accounted for about 28.8% of the global energy-related carbon emissions in 2019. In a not-unrelated statistic, China consumes almost the same amount of coal as the rest of the world put together.
Our sources on the ground in China, businesses involved in a number of industrial sectors, report that they have been directly told by the local authorities that a reduction in emissions is the main reason for the enforced outages. So seriously are the powers-that-be taking their mission on emissions, that even though many of these factories have their own generators, they have been forbidden to turn them on.
What is less well publicised is the second reason for the outages, which is a lack of coal. Despite China’s plentiful coal reserves, it still relies on imports for a significant chunk of its needs, and therein lies the problem. Indonesia, the main source of overseas coal, has been hit by rains, and Russia has a full order book. On top of this, Australia – which used to be the second-largest provider – has seen its coal banned because of the ongoing spat between Beijing and Canberra. This hasn’t stopped China turning to impounded Australian coal to help ease the shortage, although the million tons released accounted for just a single day of imports.
Dozens of mothballed coalmines are now being reopened, and Xi Jinping recently called for domestic production to be ramped up. This is, of course, a contradiction to the globally trumpeted announcement by the President that no more coal-fired power stations would be financed overseas.
Another element of confusion related to the outages is the evidence that local authorities are giving preference to companies based on the value of their products. As one executive in a company providing goods for Apple told the Nikkei, "If you don't bring as much value as, say, displays or high-end semiconductors but consume a lot of energy, sorry you are out! It's better that you just shut down and move away."
Beijing has long been trying to move its industrial base up the value chain, and in large part has succeeded. Southeast Asia, parts of Africa, and even India now house sectors no longer seen as important to the economic mix within China. The government is apparently using the energy crunch to speed up this industrial shift, and so foreign investors in sectors that are being targeted are likely to be burned.
The final reason behind the outages is something that has long been common in China: political point scoring. A major gathering of China’s leaders – the sixth plenary session of the nineteenth Central Committee – is due to happen in November, and as is often the case ahead of these events there is much manoeuvring for position. Companies and sectors are finding themselves being caught in the crossfire: “It’s likely that some companies are finding that the power shortage situation is being used by their political enemies against them”, as one China analyst told me. This is probably another reason why some factories haven’t been allowed to allay the situation with their own generators.
Such is the weight of China that the impact of the slowing of its economy in general, and the power outages specifically, will be felt across many an international border. The question is, when will the energy issue end? Happily for those citizens fearing the worst for when the really cold weather starts at the end of November/early December, the energy crisis is likely to have cleared up by then. The run up to Christmas and its associated bulge of manufacture will be winding down, and the new push for domestic coal production may be feeling itself felt.
More cynically, the end of November will also coincide with the end of the COP26 talks, and the end of the CCP’s plenum.
If, however, the power outages aren’t under control by mid-December, then China analysts are going to have to start looking at them being a structural part of the economy, with all the repercussions that will bring. Perhaps more importantly, it would show that there is political turmoil to match. Neither scenario is a cold that the world, fragile in its recovery and riven by turmoil, needs to catch right now.