China power shortage has made manufacturing activity unexpectedly slump in September. At least 20 provinces, including many industrial heartlands, have suffered power shortages in recent weeks, with some unplanned and indiscriminate cuts.
What has caused a power shortage in China?
The fundamental reasons for China’s electricity crisis are the high price of coal and Beijing’s green ambition by strictly limiting energy use. As the economy recovered from the pandemic, strong demand from producers and industry has driven coal prices to record highs, resulting in widespread power outages. Meanwhile, Beijing has attempted to tighten emissions standards to meet its climate target.
How does China power shortage impact manufacturing?
China power shortage is putting a strong impact on most economic sectors, including two major sectors, construction and manufacturing. These industries accounted for almost 70% of China’s electricity consumption last year and are crucial to the economy’s recovery in 2021, according to China’s National Bureau of Statistics.
In September, the Purchasing Managers’ Index (PMI), an indicator of economic health for the manufacturing sector, was 49.6, falling from 50.1 in August. The new orders sub-index fell for two consecutive months, “reflecting a slowdown in manufacturing activity and market demand”.
According to Bloomberg, nearly half of China’s localities have exceeded the energy consumption targets set by the government and are under pressure to restrict electricity use. The places most affected are Jiangsu, Zhejiang and Guangdong – the industrial trio of provinces that make up for nearly a third of China’s economy.
China power shortage has impacted production of everything from aluminum and steel to toys and clothing. All factories are being ordered to restrict activity; in some cases, they have to be closed completely.
Clark Feng, whose Vita Leisure Co. buys tents and furniture from Chinese manufacturers to sell overseas, said electricity shortage in the eastern province of Zhejiang have dealt another issue to businesses. He said fabric makers in the province that are facing production halts have began to increase prices and postpone taking new overseas orders.
China power shortage is the next shock to supply chain
China’s power shortage is a big threat that slows down economic growth and disrupts the global supply chain right before the year-end shopping season of 2021. “The shock to the power supply in the world’s second largest economy, the largest producer, will spread and affect the global market,” analysts at Nomura forecast.
More specifically, the decline in production output and the risk of slow deliveries across China will be likely to worsen already tight global supply chains. Power cuts could make Chinese manufacturers adjust their work schedules and challenge delivery deadlines. Besides that, the prices of raw materials and essential ingredients are pushed up further.
“Supply disruptions are quite common and will continue to happen in the coming months,” said Cui Li, head of macro research at CCB International Securities.
CNBC also reports that China power shortage has limited or halted production, forcing foreign businesses on the fence about investing in factories elsewhere, said Johan Annell, partner at Asia Perspective, a consulting firm that works primarily with Northern European companies. While China is still a “very strong destination” for manufacturing, he said the businesses are now looking to invest instead in Southeast Asia, particularly Vietnam.
Source: Reuter, CNBC, Bloomberg