News Analysis
Factories in China are being forced to shut down amid an energy crisis, as more than half of the provinces have imposed electricity-use restrictions. Forced reductions even apply to Jiangsu, Zhejiang, and Guangdong provinces, which generate roughly one-third of the nation’s GDP.
Local governments are enforcing shut-down rules in their attempt to meet energy-use and emissions reduction targets set by Beijing. As a result, some companies have cut production by as much as 50 percent, adding to existing supply chain disruptions. The situation is particularly damaging as exporters scramble to fulfill merchandise orders for the upcoming Christmas season.
Previous COVID-19 lockdown measures included shutting factories, preventing migrant workers from getting to the cities to work, and closing ports. After a year and a half of disruptions, many companies were hoping that Christmas orders would pull them out of the economic doldrums, only to be hit by the latest restrictions.
China’s overall economic outlook was already quite grim, after more than a year of reduced exports and increased unemployment. Plagued by a potential credit crisis, the Chinese banking and real estate sectors are both facing possible fallout from the Evergrande defaults. The company is one of the largest property developers in the world and could potentially default on loans equal to 2 percent of China’s GDP. Other crackdowns by Xi Jinping are also straining the economy such as banning for-profit education, a move which instantly eliminated 11 million jobs.
Xi’s new restrictions on tech companies and the halting of the Ant Group IPO are sending ripples through the stock market, as investors are uncertain about the risk and potential rewards, or lack thereof, in the various investments they used to believe were solid. Reduced returns, combined with an increased risk of arbitrary changes in government regulations, could mean reduced investment, which ultimately results in increased unemployment and a slowing economy.
Blackouts are interfering with manufacturing industries, as well as aluminum smelters and textiles producers. Even soybean processing plants are shutting down, threatening China’s food security. Around 160 energy-intensive companies have been closed. Smaller companies, listed on stock exchanges, have already informed regulators that they have been told to cut production by as much as half.
Global shortages are expected in toys, textiles, and machine parts, while even iPhone manufacturers are expected to reduce output. Heavy industry, such as steel production, as well as downstream sectors, are all expected to feel the crunch, driving prices higher. Apple Inc. and Tesla Inc. have stopped production at some of their facilities in China. Analysts in China have said that they cannot predict when the supply chain bottlenecks will end.
The Chinese Communist Party (CCP) has issued statements, saying that it is trying to avoid having the power shutdowns affect people’s homes. In spite of the CCP’s promises to the contrary, the outages are already impacting the lives of ordinary citizens. Liaoning, Jilin, and Heilongjiang have been suffering blackouts for weeks. Guangdong has asked residents to use natural light indoors and to refrain from using air conditioning. In Jiangsu, steel mills have closed and street lights are out. Some companies have been told to operate only every other day. Local governments project that the problems will persist until next year. They have also warned residents to expect periodic water cuts.
China, the world’s largest polluter, has set a goal to be carbon neutral by 2060. With the upcoming COP26 at the 26th U.N. Climate Change Conference, it appears the CCP wants to show the world that it is taking climate change seriously. Additionally, Xi is focused on having blue skies at the 2022 Winter Olympics. Consequently, the central government has set draconian pollution reduction targets, which over half of China’s regions have failed to achieve. Now, the CCP is ratcheting up the enforcement.
Another reason for the blackouts has been surging prices of coal and gas. Coal power accounts for 70 percent of China’s electricity generation. Over the years, China’s electricity demand has grown at nearly the same rate as its GDP. As part of his climate agenda, Xi has capped coal mining. Pandemic lockdowns have boosted pent-up demand, while decreased investment in the mining sector has decreased the supply of coal. As a result, the prices of thermal coal futures have surged in China as production slows down, just before the winter.
In addition to reducing local coal production, the CCP has banned coal shipments from Australia because of a political row. Beijing could be making up the deficit by increasing coal imports from Mongolia, but Mongolian coal exports to China have actually declined due to China’s increased border restrictions.
Global coal prices are increasing, while the price Chinese utility companies can charge customers for electricity is fixed by the central government, causing a shortage of electrical power. If power prices were allowed to adjust to market levels, Beijing fears that increased power costs and rising prices of raw materials would drive up the wholesale price of Chinese goods, making them less competitive. Additionally, this would make China a less attractive place for foreign companies to do their manufacturing.
The power shortages and resulting supply chain disruptions in China are not entirely unavoidable consequences of market forces. Much of the problem has been caused by and is being exacerbated by the poor policy decisions of the CCP. Now, people from China, the United States, and around the world will be looking at increased unemployment, supply chain interruptions, product shortages, slowing economies, and higher prices.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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