Beijing has ordered its banks to support the financial needs of coal and energy companies. With nearly two-thirds of provinces grappling with power rationing, China’s power supply situation continues to challenge the economy.
“Banks and other financial institutions should prioritize lending to qualified mines and power plants, and make them ensure to boost thermal coal and electricity output,” said China Banking and Insurance Regulatory Commission in a statement (pdf) on Oct. 4.
The country is in the midst of a power crisis, as shortages of coal are combined with high demand from manufacturers, industries, and households. This has driven coal prices to record highs and forced widespread usage restrictions.
China’s current power crunch is reportedly affecting about 20 provinces and regions, representing over 66 percent of its gross domestic product (GDP).
Wall Street investment bank Morgan Stanley estimated that China’s energy demand has increased by nearly 15 percent over the past 12 months, while domestic coal supply increased by just 5 percent so far this year.
Coal has long been critical to China’s power generation and the broader economy, accounting for approximately 70 percent (pdf) of the country’s electricity.
More than 90 percent of China’s coal is mined locally, and the country has produced around 3.8 billion tons of coal every year in the past decade—the same level as the rest of the world combined.
Beijing has, however, discouraged the burning of coal as Chinese Communist Party (CCP) leader Xi Jinping has pushed to reduce greenhouse gas emissions and go “carbon neutral” by 2060. Xi is now focused on having blue skies at the 2022 Winter Olympics.
Since the CCP set a goal to lower coal’s share in its overall energy mix, some financial institutions have stopped lending to the industry.
On the other hand, coal prices have soared to record highs following Beijing’s decision to suspend imports from Australia in 2020 due to a trade dispute. And supplies from Indonesia, China’s largest overseas coal provider, have been hampered by persistent rainfall.
Meanwhile, the penalty for violating workplace safety rules has been raised from fines to possible jail time in newly amended Article 134 of the regime’s criminal laws, further deterring mine operators from boosting production.
China’s energy rationing is threatening to worsen a lack of momentum throughout the nation’s financial system. Wall Street banking giant Goldman Sachs reduced its 2021 China growth forecast to 7.8 percent from 8.2 percent, citing “vital drawback pressures” from power shortages.
Data from China’s official manufacturing Purchasing Manager’s Index (PMI) in September was at 49.6, down from 50.1 in August. The economic indicator fell below score 50 for the first time in the past 19 months.
The 50-mark separates monthly growth from contraction.
“The manufacturing PMI fell below the critical point due to the low sentiment of high energy-consuming industries,” said the statistics bureau of the CCP.