Chinese power problems affirm EIU’s forecast downgrade

Droughts across the provinces of Sichuan and Chongqing since mid-August have prompted power rationing, which threatens to affect industrial supply chains at a time of rising economic fragility. Worsening business conditions affirm EIU’s decision to downgrade its forecast for real GDP growth in China this year from 4% to 3.6%, particularly as covid‑19 controls continue to depress household spending.

Why does it matter?

The near-term growth outlook for China is darkening. Sichuan is China’s largest producer (by output) of hydropower—a resource that accounts for over 80% of the local energy mix—and the province is an important supplier of power to China’s coastal regions. The current heatwave thus poses severe challenges to China’s national energy supply, which will exacerbate economic pressures stemming from property sector weakness, recurring pandemic-induced lockdowns and softening global demand.

The inability of larger ships to traverse low water levels in the Yangtze river will also cause delays in regional shipping and logistics. This will have a dampening effect on industrial production and trade activity.

Sichuan and Chongqing are also important manufacturing hubs in Western China, particularly in industries such as electronics (including semiconductors), automotives, aviation and pharmaceuticals. These industries are also large energy consumers, creating competing sources of demand between local users and Sichuan’s role as a power exporter.

We do not expect the authorities to find a short-term solution to this problem, as evidenced by the fact that policies adopted in late 2021, following a severe power shortage around this same time last year, failed to prevent this same issue from re‑emerging.

The immediate official response has been to force the closure of regional factories, in order to preserve power for residential use. This threatens immediate operational disruption to foreign companies, many of whom either have operations or source critical inputs from the affected regions.

Compounding this is the fact that cities in western China have generally fared better than their coastal counterparts in terms of maintaining economic normality amid covid‑19. The shuttering of regional factories will consequently frustrate any corporate contingency plans aimed at offsetting pandemic shutdowns by relying on production in areas of China less affected by draconian movement controls.

What next?

The power crunch will further erode near-term opportunities for local business expansion, which we expect to reinforce (if not accelerate) plans among multinational firms to diversify their regional foreign investment footprints in 2022‑23. The crisis also has longer-term implications, with authorities now pivoting back to coal power generation to make up for the shortfalls in hydropower output. Since late 2021 China has increasingly prioritised near-term growth concerns at the expense of longer-term climate ambitions; we do not expect a focus on green energy to re‑emerge until 2023. 

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