How China’s energy crisis is its next big economic risk


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China has introduced more stringent emissions targets to meet its climate targets.

AFP via Getty Images

As China continues to grapple with the Evergrande situation, a power shortage poses a second major economic challenge.

Shortages of coal and natural gas, similar to those in Europe, are part of the root of the electricity crisis. The tough emissions targets introduced by Beijing as part of an effort to tackle climate change made matters worse. Local authorities must try to avoid exceeding energy consumption limits even as the economy recovers from the Covid-19 pandemic increases demand.

Electricity is so scarce that a number of factories, some of which


Apple

(ticker: AAPL) and


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(TSLA), have stopped production. Apple component suppliers Eson Precision Engineering (5243.Taiwan) and


Unimicron technology

(3037.Taiwan) both said on Sunday they were stopping production until Thursday, citing orders from local authorities.

China has pledged to reduce energy intensity, a measure of energy used per unit of economic growth, by 3% by 2021 to meet climate targets.

Read: Rising oil prices. Here’s how far Goldman Sachs says they can go.

The shortages have started to affect household use, but the effect on industrial production has prompted analysts to downgrade their forecasts for economic growth. Nomura reduced its call for annual growth in China’s gross domestic product to 7.7% from 8.2%.

And the bank’s chief economist in China, Lu Ting, said it could be lowered even further.

“Markets are now so perplexed by the fallout from the real estate sector that they could ignore Beijing’s unprecedented restrictions on energy use and energy intensity,” the economist said in a research note Friday. “Beijing’s unprecedented determination to enforce limits on energy consumption could lead to long-term benefits, but the short-term economic costs are substantial,” he added.

Read: 8 actions on the bright side of China’s regulatory crackdown


China International Capital Corp
.

said the shortages would reduce the country’s growth rate by 0.1 to 0.15 percentage points in the third and fourth quarters.

If production cuts persist for the rest of the year, Morgan Stanley analysts predict a 1 percentage point impact on fourth-quarter GDP growth.

The


Shanghai Composite

The index fell 0.8% on Monday, bringing its total drop on Friday and Monday to 1.6%, the largest drop in two sessions since August 17.


Nasdaq Composite,

home to many tech stocks, was down 0.7% on Monday afternoon.

Write to Callum Keown at [email protected]


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