MNI: Green Targets Seen Limiting China Factories, GDP, In Q4

Chinese factories are likely to face renewed constraints on energy supplies in the fourth quarter as authorities stick to green targets after allowing a boost to domestic coal production in response to September's power shortages which fed producer price inflation, advisors told MNI.

Power companies will prioritise residential supplies over those to factories, especially during winter, said Wang Jun, chief economist at Zhongyuan Bank. While this will constrain industrial production, officials will have room to allow factories to run more slowly thanks to a high rate of expansion in the first half of the year thanks to base effect comparisons, meaning that 2021's economic growth target of more than 6% can easily be achieved, said Su Jian, director of the National Center for Economic Research at Peking University.

As it moves to reduce emissions in line with long-term targets such as carbon neutrality by 2060, China is aiming at cutting total energy consumption per unit of GDP by 3% in 2021, and had achieved a cut of 2.3% by end-Q3.

But a dry, hot summer in southern China which sapped hydroelectric power generation prompted higher demand for coal, leading suppliers to hike prices amid widespread blackouts in September. Authorities responded by allowing coal miners to boost production, with key producers' average daily output jumping 4.5% in early October from September, according to a report by Industrial Securities.

But this boost to coal production will not divert officials from their energy-saving goals. With factories having to make do with less power, Su estimates Q4 GDP expansion will slow to around 4% from 4.9% in Q3.

TACKLING A SLOWDOWN

While authorities are likely to respond to this relative weakness in the coming months, they will do so by stimulating consumer demand, rather than factory output, Su said. This could come via lower home loan rates and incentives for big-ticket item sales, along with increased liquidity injections via People's Bank of China open market operations, he said.

Along with weak GDP growth in Q3, October factory gate prices rose at the fastest pace in 26 years, with energy costs a leading cause – a situation which Wang characterised as "quasi-stagflation" or "atypical stagflation". Other analysts downplay concerns over inflation by pointing to moderate consumer prices.

In the shorter term, energy prices are easing. Thermal coal futures and spot prices dropped more than half in early November from seasonal highs in mid-October, after reports that state-owned coal companies in Shanxi province were ordered to lower prices for standard 5,500 Kcal/kg coal to CNY900 per tonne, from around CNY2,000.

Daily coal output reached a record high of 12.05 million tonnes on Nov. 10, an increase of 120,000 tonnes from the previous peak, the National Development and Reform Commission said on its website.

"The power crunch has largely eased in the short-term with the government's strong intervention to tame coal prices, and large-scale blackouts back seen in September are unlikely by the end of this year," said Wang.

A SPEED BUMP

But historical data indicates a speed bump ahead with average daily coal consumption up 5.7% and 12.5% m/m in November and December in the past decade, requiring more domestic output and imports to meet a gap, according to Industrial Securities.

China's recent growth has been powered by exports and industrial production after pandemic lockdowns in early 2020, but green targets are imposing constraints. Some local governments abruptly ordered power cuts at factories earlier this year, said Wang.

Wang, an academic committee member at the China Center for International Economic Exchanges, expects weakness in both the supply and demand sides of China's economy to last until the first half of next year.

"It's still necessary to cut the reserve requirement ratio or lower the [benchmark Loan Prime Rate] next year in the face of increased economic headwinds," said Wang.