The Chinese economy is shutting down. Yuan Talks:
China’s ongoing energy use restrictions and power crunch are hurting industrial production across several regions and dragging on the country’s economic growth, analysts say.
The current round of power shortage is mainly due to the country’s so-called “dual energy control”, referring to the country’s efforts to cut energy consumption and energy intensity, the amount of energy consumed per unit of GDP, analysts say.
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China aims to lower its energy consumption per unit of GDP by around 3 per cent in 2021 to meet its climate goals. However, only 10 of 30 provinces managed to achieve their energy goals in the first half of the year.
On August 12, the National Development and Reform Commission (NDRC), the top economic planner, published a list of of provinces that failed to meet the “dual energy control target” during the first six months of the year. The provincial governments have introduced measures to limit power use by high energy-consuming industries such as steelmakers, coal miners, non-ferrous metal producers, chemical companies and building material providers.
According to statistics by the China International Capital Corporation (CICC), a total of 17 listed companies had announced production suspension this month as of September 23, the second-highest level for the same period and only after May 2018 during the peak of China’s efforts to cut overcapacity.
Most of the companies that have announced production limits so far this year were in basic chemical industry (19 companies), non-ferrous metal companies (19 companies) and coal miners (9 companies) and a majority of them are located in Henan province, Jiangsu province and Shandong province, according to CICC.
“The impact of power supply constraints are expected to last,” according to a CICC research note.
About 67 per cent of China’s power supply comes from coal-fired power plants, but China’s coal supply is in an extreme shortage, said Lu Ting, chief China economist at Nomura.
In the period of January – August this year, China’s raw coal output increased by only 4.4 per cent from a year ago, while coal imports slumped by 19.5 per cent, sending coal prices soaring and dampening power plants’ production.
China’s industrial production is expected to see continued restrictions from energy control measures in the fourth quarter, though there may be some marginal improvement compared to September, according to CICC.
Power rationing situation is likely to improve slightly in October, but the tightness is unlikely to ease before the 2021 United Nations Climate Change Conference to be held in November in Glasgow 和 China’s 2022 Winter Olympics, said Lu.
According to estimates by Guosen Securities, output of ferrosilicon, electrolytic aluminium, non-ferrous metals, silicomanganese and cement in the nine provinces that failed to lower energy intensity in the first half account for more than 30 per cent of China’s total output, which could lead to further tightness in supplies and drive the growth of producers’ price index (PPI ) even higher in October.
Driven by surging commodity prices, China’s PPI jumped by 9.5 per cent year over year in August, the fastest growth since September 2008, according to official data.
Given the continued energy control measures and coal shortage, China’s PPI growth is expected to be maintained above 9 per cent in the rest of the year, CICC estimates.
The transmission from PPI growth to non-food CPI growth will continue and China’s CPI growth is expected to accelerate in the coming months, likely to jump above 2 per cent in November, said CICC. Official data showed that non-food CPI grew by 3 per cent year over year in August, the fastest growth since 2019.
Power use limits will continue to bring disruptions to industrial production and drag on China’s economic growth.
Based on CICC’s statistics, the combined industrial production of the provinces that failed to meet energy control targets in the first half accounts for about 70 per cent of China’s total industrial output.
The impact of the measures are mostly felt in September and CICC estimates that the growth of industrial output this month will slow to 4 – 4.5 per cent year over year from 5.3 per cent in August, and that will knock off 0.1 – 0.15 percentage point from the economic growth in the third quarter.
Assuming that 30 per cent of the industrial production currently subject to power use restrictions will continue to suffer restrictions in the fourth quarter, that will drag down the economic growth in the last three-month this year by around 0.1 – 0.15 percentage point, said the bank.
Nomura expects bigger impacts of the power use restrictions on China’s economic growth. It cut its third and fourth-quarter GDP growth forecasts to 4.7 per cent and 3 per cent, respectively, from 5.1 per cent and 4.4 per cent previously, and its full-year forecast to 7.7 per cent from 8.2 per cent.
Notably, the bank estimates that China GDP will drop by 0.2 per cent in the third quarter from the previous three-month, citing the impacts of the slowdown in the real estate sector and power restrictions.
Check this out:
Industry, property and infrastructure are fast headed into recession. Yet here is what Wall Street is saying via BofA:
We are optimistic about the near-term outlook for China. Keep in mind that both an advantage and a disadvantage of a command economy is the ability to switch policy quickly. The disadvantage is that it is easy to hit the brakes too abruptly as new priorities are mandated—changing prices has much more subtle impacts than restricting quantities. This is likely today with the“three red lines” policy around the property market, the restrictions on emissions in the commodity-producing sector and the sharp shift in regulatory oversight in some industries.
The advantage is that these policies can also be quickly reversed or modified. Stepping back, perhaps the optimal policy for China is not to abandon its goals but adopt a more patient approach. As such, Helen Qiao and team expect at least some easing in the three main factors slowing growth. First and foremost, regulators will likely step in to ensure an orderly wind-down of Evergrande and will take steps to ensure the continued flow of credit to the property sector.
Second, there may be a loosening up restrictions on commodity production and fewer regulatory shocks.
Third, as vaccination continues to roll out, as inmany countries,we expect a boost to growth and a relaxation of supply-chain constraints. Qiao is well below consensus for the current quarter, with sequential growth of 1.4%, but expects growth of 5.2% in 4Q. A critical question is, why is the government waiting so long? Qiaoand team had been expecting some kind of policy signal this summer but only now are hints of changes floating in the press. One answer is that, with the economy growing so fast coming into the New Year, the government likely thinks it could afford to risk a sharp slowing in growth. As weak data continues to come in, however, presumably policy will ease.
5.3% in Q4? What are these people smoking? Even if it stimulates now it won’t impact growth until Q2 next year.
Now add the charming Goldman Sachs:
Fade macro risks on firming fundamentals. Undeterred by the slowdown in global growth and the looming Fed taper, commodities have continued to march higher. Real assets are behaving exactly the way we expected since peak growth and early tapering are raising risks for risky assets but not physical assets. From gas to thermal coal, carbon or aluminium, supply constraints in the commodity sector are biting at a time that the velocity of inventory declines is accelerating and the coming winter is creating asymmetric weather-driven price risk. With inventory buffers exhausted these supply constraints are beginning to create real demand destruction.
Overweight energy and aluminium. We expect strong returns from the energy complex on further oil price appreciation, with Brent now set to hit $90/bbl by year-end, and widening backwardation as the oil market deficit pushes crude oil inventories to lower levels. The scarcity premium in natural gas is fundamentally justified by a low inventory cushion and the need to destroy demand, but creates knock-on impacts not just for thermal coal and CO2 prices but also for petroleum products where US stocks are already very low following Hurricane Ida. Should gas balances require gas-to-oil switching then that could be short-term bullish for petroleum products cracks and time spreads. Put simply, we see a high risk that in anything but a benign winter, energy prices push substantially higher. We also see scarcity price risks rising for aluminium, helped by a sharp rise in European and Chinese power prices, and thus highlight that we are overweight the energy-intensive metal.
Asymmetric payoffs for investors. Given the secular trends in place for a structural bull market, we believe investors will be drawn back to the complex. Relative to tight fundamentals, commodities remain under-invested as price-adjusted AUMs in the two major commodity indices are down 25% YTD. We believe the reflation capitulation this summer has led to commodity liquidation and the volatility of recent weeks has made it difficult for the asset class to attract back some of these flows. Yet it is important to remember that these markets remain physically supported by fundamentals leading to much more limited downside in prices than the positioning unwind would suggest. This creates an asymmetric payoff for investors, in our view, and supports our long commodity call.
Just about weekly now the Goldman commodity team puts out the same note. At no time has it admitted it’s gotten a lot of the trade wrong. Indeed, many metals are considerably down or flatlined in recent months and that is why the market has sold off commodity AUM.
But on energy, Goldman is on the more solid territory. My view remains that there is no underlying shortage of oil, gas, coal or any other form of power. But there is an apparent market deficit on a mix of temporary supply constraints and temporary exaggerations in demand. Sadly, they are probably enduring enough to threaten a major price blowoff if we get a harsh northern winter which will bring mayhem and death to many if power prices skyrocket.
If China follows the Wall Street prescription and goes all-in on a bailout plus lifts its “three red lines” policy then energy is going parabolic. This will trigger massive demand destruction in China anyway.
In short, one of the reasons that China is waiting so long to stimulate is that it needs to pop Wall Street’s energy bubble first.
Obviously enough, this risks greater downside momentum, not upside, for growth.