Acute power shortages in China and India, the two biggest drivers of global growth, are casting a pall over Asia’s economic prospects and raising the risk that inflationary pressures may ripple through the region.
Several leading China economists expect growth in the world’s second-largest economy to slow appreciably in coming months as power shortages hit industrial output and a property sector downturn further reduces activity.
“We’ve cut our China growth forecast [in the fourth quarter] to 3.6 per cent from 5 per cent and for 2022 to 5.4 per cent from 5.8 per cent,” said Louis Kuijs, head of Asia economics at Oxford Economics. “This is despite our expectation of a shift in economic policy in [the fourth quarter] to support growth.”
Andrew Batson, director at Gavekal, a research company, said: “China’s growth will slow in the coming months, given the deepening property downturn and spreading power shortages.” However, he expected strong exports and solid capital investment to lend some support.
Miao Ouyang and Helen Qiao, at Bank of America, said China suffered a crunch in industrial output in September because of sharp production cuts in energy-intensive industries. They also expected gross domestic product growth to be affected.
China has for several years contributed the largest share to global GDP growth and the IMF forecasts that this year the country’s economy will grow at 8.1 per cent. India’s economy is expected to expand at 9.5 per cent this year, the IMF says.
In a long-range forecast issued before the pandemic, the IMF said that between 2019 and 2024 China would account for 28 per cent of global growth and India 15 per cent — identifying them as the world’s top two growth drivers, ahead of the US in third place.
But India too is being hit by an acute shortage of coal, which is crucial for generating the electricity that underpins growth. As of October 3, India’s 135 thermal power plants had just four days’ worth of coal stocks, down from 13 days on August 1, the power ministry said on Tuesday. The government said coal dispatches by Coal India were increasing after monsoon rain delays.
Economists have warned that widespread power cuts could damage growth just as India’s industrial output is finally reaching the pre-pandemic levels last seen in February 2020. The country is also gearing up for its annual festival season, when power demand rises sharply.
“It’s not a very happy situation,” said Sunil Kumar Sinha, principal economist at India Ratings & Research. “After the second wave of Covid, the economy has started normalising and growth is picking up . . . If at this juncture the country is hit by a power shortage, I’m afraid that will have a very significant impact on growth.”
About 66 per cent of India’s total electricity production comes from coal-fired thermal power plants, up from 62 per cent in 2019. Generation of electricity from hydropower, gas and nuclear declined because of erratic monsoon rains, higher prices and maintenance at nuclear power plants.
Unless the government can efficiently allocate tight coal supplies, Sinha said India could face similar problems as China, with industries forced to either shut down or rely on more expensive alternative power, such as their own captive generating plants.
The causes of China’s power shortage suggest that a swift resolution is unlikely. Alicia García Herrero, chief economist for Asia-Pacific at Natixis, ascribed the crunch to a “triple whammy” of factors.
First, local governments are rushing to comply with Beijing’s emission targets and have therefore been restricting coal-fired power generation. Second, there is a shortage of coal supplies as the country transitions to renewable energy. Third, price caps on electricity mean that demand is unaffected by increasing costs of coal and other inputs.
All this is applying immense pressure on Beijing to free up electricity prices — but this adds to an inflationary outlook. “The policy overshoot has caused too many power producers to close to avoid financial loss,” said Michael Gill, Asia director at Dragoman, a consultancy. “Pricing freedom should fix that.”
China appears to be taking a gradualist approach to raising power prices. In Guangdong province, for instance, authorities applied a 25 per cent increase to electricity prices this month but imposed it only at peak times and only on industrial users — thus sparing households. Some other provinces may follow suit, analysts say.
Such an approach is aimed at damping consumer price inflation, even as producer prices — including coal, metals and other commodities — surge higher. China’s producer price index leapt 9.5 per cent in August and BofA economists are predicting a further lift to 10.5 per cent for the month of September.
The consumer price index, by contrast, was only 0.8 per cent higher in August and Bank of America forecasts it may actually soften to 0.6 per cent in September.
The battle over price pressures is crucial. If inflationary pressures get out of hand, Beijing may be obliged to tighten monetary policy, further impacting the outlook for growth in coming months.
There will also be fallout for the wider world.
“China’s power shortages have global implications,” said Ting Lu, chief China economist at Nomura. “Global markets will feel the pinch of a shortage of supply from textiles, toys to machine parts . . . [and] very likely result in a shortage of goods for Thanksgiving and Christmas.”
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