‍‘Over the next six months or more, the energy crunch in China will be an even bigger challenge than Evergrande. Will make the Evergrande problem look tiny and has huge global implications. The lights go out in China!’ one experienced and very well-respected reader of long residence in China wrote to me in response the last issue on Evergrande.

• And he may well be right. In any case, China’s challenges are piling up right now.
• The power shortage is just the latest: Goldman Sachs estimate that as much as 44% of China's industrial activity has been hit by the power shortages.

‘The electricity crunch has laid bare one of China’s strategic weaknesses: It is a voracious, and increasingly hungry, energy hog,’ writes The New York Times’ Keith Bradsher in ‘China’s Power Problems Expose a Strategic Weakness.’

• ‘China’s electricity shortage is rippling across factories and industries, testing the nation’s status as the world’s capital for reliable manufacturing.’
• ‘A bread company can’t get all the power it needs for its bakeries. A chemicals supplier for some of the world’s biggest paint producers announced production cuts. A port city changed electricity rationing rules for manufacturers four times in a single day.’
• ‘Until enough power comes online, China’s factories risk unexpected and destabilizing stoppages.’
• And so do the foreign companies who depend on their products and participation in their supply chains.

Impact on GDP?

• Eswar Prasad, a former head of the IMF’s China division who now teaches at Cornell University, is quoted in the Financial Times: 'The emphasis on deleveraging, squeeze on property speculation and energy shortages are likely to have substantially dented China’s already weak growth momentum.’
• Goldman Sachs (and it wasn’t the only one) has cut its forecasts for China’s economic growth in 2021 as constraints on energy consumption added to headwinds facing the world’s second-largest economy - it now expects China’s economy to grow 7.8% in 2021 compared with a year ago, lower than its previous forecast for an 8.2% year-on-year expansion.

If you do business in China or depend on China as part of your supply chain, or if you are an investor in China or Chinese financial products, take heed.

• And don’t forget the rest of the world: The power shortage is global.

BTW, Trivium China is having another of its terrific Flash Talks – this one on ‘China's systemic power disruptions’ on October 21 at 9:30am EDT. A don’t miss.

• For more information and to register, click here.

Read on for more about a few aspects of the power shortage in China and the world.

• Lots of lessons here about how the Chinese government works and how it manages Chinese businesses.

And be sure to send me your take.

1 | The Scope of China’s Power Shortage

These the shortages began as early as May. In the ‘European Chamber Stance on China’s Energy Management Measures,’ the EU Chamber of Commerce in China writes:

• ‘In May 2021, manufacturers in Guangdong were told by the local authorities to curb energy consumption, leading to many companies having to abruptly shut down operations for several days at a time.’

Reuters reports ‘Rationing has already been in place in at least 17 of mainland China's more than 30 regions since September, forcing some factories to suspend production and disrupting supply chains.’

2 | Why? The Big Picture

Broadly speaking, as countries began recovering from the pandemic, global demand for products from the China – the world’s top manufacturer - suddenly and unexpectedly shot up this year.

• And China’s power sector couldn’t keep up.

70% of China’s electricity comes from coal-fired power.

• And the power sector has been moving away from the use of coal as fuel toward greener options.
• On top of this, the stockpile of coal was already low.
• With coal mining down, the supply of foreign coal limited because of the ban on Australian lignite, coal prices going up sharply, China couldn’t quickly increase supply.
• Hence, the power shortage.

3 | A Note on China’s Ban on Australian Coal

In 2020, Beijing began a full-out bullying campaign against Australia.

• The reason: Australia called for an impartial investigation in the origins of COVID-19.

One part of China’s pressure campaign to hurt Australia was an informal ban on its coal.

• And, as the chart shows, Australian coal exports to China have fallen sharply.

Australia has hung tough – good on them.

• But now China needs that coal and has quietly started letting small shipments through customs.
• Karma or what goes around comes around or any other cliché you think fits.

4 | Why? More Details

IHS Markit on September 29 in ‘Tight coal supply and climate-related control result in wide-spread power outages in China’ reported: ‘China is currently going through one of the most significant power outages in a decade.’

• ‘By September 28, 22 provinces have experienced different degrees of load shedding measures.’
• ‘For a nation that has largely maintained power supply security during two decades of robust growth, it is astonishing to see that nearly two-thirds of the country are suffering from power shortage - and not during summer or winter peak demand seasons.’

‘So far 12 provinces have identified coal supply shortage as the key reason behind for power rationing or rolling blackouts.’

• ‘In the three provinces in northeast China—Liaoning, Jilin and Heilongjiang, in particular, even residential power usage is affected, a rare occurrence for a country putting household energy supply in a prioritized category [to prevent social unrest].’
• ‘For most provinces, industrial power rationing remains the key measure.’

‘For these 12 provinces, shortfall in coal-fired power generation - stemming from fuel shortage and skyrocketing coal prices - is a chief cause for power outages.’

• ‘By September 2021, thermal coal price is reported to have tripled from a year ago.’

‘Meanwhile, policymakers have demanded coal-fired power tariff remain on par with on-grid benchmarks, which were calculated during much lower coal price periods.’ So coal-fired power plants are losing money and don’t want to produce.

• ‘Although policy change a few days ago approved 10% increase from the local benchmark power price in a number of provinces, this price hike will only marginally reduce the losses made by coal-fired power generators.’
• ‘This disconnect between market-based coal prices and tightly regulated power prices has led to power supply disruptions in the past, especially when coal prices were high.’

‘A series of supply shocks have contributed to the coal price surge.’ And slowing energy production.

• ‘Domestic coal supply disruption started with the anti-corruption campaign in Inner Mongolia last year, followed by a few rounds of heightened safety inspections and environmental checks.’
• ‘In addition, under new production regulations, it is now illegal for coal miners to produce beyond their approved nameplate capacity - a practice that had been allowed previously.’
• ‘Coal imports have also been weakened by floods in Indonesia, the import sanction on Australia, as well as new Covid-19 outbreaks in Mongolia.’

5 | Why? Even More Details

‘The European Chamber believes there are several reasons why electricity is suddenly in short supply in China,' writes the EU Chamber of Commerce in China provides an on-the-ground explanation for the shortage is in tits ‘European Chamber Stance on China’s Energy Management Measures,’:

• ‘In mid-August, the National Development and Reform Commission (NDRC) released a notice on provinces’ energy usage in order to enforce China’s ‘dual control’ targets for reducing both energy consumption and energy intensity.’
• ‘The notice highlighted the fact that, during first half of 2021, only 10 out of 30 regions achieved their energy reduction targets.’
• ‘As a result, local governments are now taking extreme measures in order to achieve their targets before the end of the year.’

‘This situation is being further exacerbated due to both the current energy mix and deficient infrastructure: the power supply from new energies (wind and photovoltaic) is unstable, and is not sufficient to make up for the shortfall of thermal power and hydropower generation.’

• ‘In addition, rising prices for coal and gas have sharply increased costs for power producers, who are reluctant to increase supply as they would incur losses.’

‘Recent arbitrary actions taken by local authorities have lacked transparency and consistency, and furthermore have no legal grounds.’

• ‘They are seriously jeopardising companies’ operations in China, creating short-term safety risks—especially in the chemical and healthcare industries—and undermining business confidence in the medium to long-term.’

Now multiply that by the number of Chinese companies affected.

6 | China Moves

‘ “We will make every effort to increase coal production and supply,” said Zhao Chenxin, the secretary general of the National Development and Reform Commission, China’s top economic planning agency,’ reports The New York Times.

• ‘Mr. Zhao said that even with the push for more coal production, China would continue efforts to become more energy-efficient.’ A tough act to balance.

‘The authorities have announced a national rush to mine and burn more coal, despite their previous pledges to curb emissions that cause climate change.’

• ‘Mines that were closed without authorization have been ordered to reopen.’
• ‘Coal mines and coal-fired power plants that were shut for repairs are also to be reopened.’
• ‘Tax incentives are being drafted for coal-fired power plants.’
• ‘Regulators have ordered Chinese banks to provide plenty of loans to the coal sector.’
• ‘Local governments have been warned to be more cautious about limits on energy use that had been imposed partly in response to climate change concerns.’

‘Power rationing appears to have eased somewhat since late last month, when widespread blackouts and power cuts caught factories by surprise.’

• Something is working; we just aren’t sure what.

But ‘the winter heating season officially began on October 15th in the country’s northeast and continues into north-central China next month.’

• And Beijing will be forced to choose.

‘ “They have to sacrifice something to make sure households will have heat and power,” said Chen Long, a co-founder and partner of Plenum, a Beijing economics and politics research firm.’

• ‘ “They have to cut energy-intensive industries.” ’

And there goes GDP for China and with it uncertainty about and interruptions of supply chains for the rest of the world.

7 | A Little Global Context

China was hit first. But it is just one country or region facing an energy crunch and its implications.

• Power plants in India are running out of coal.
• Gas prices in the U.S. are higher than before the pandemic.
• And ‘British gasoline stations running dry, surging power costs in the European Union ahead of winter, forced restrictions on energy use in China and rising oil, natural gas, and coal prices,’  Reuters’ reports in ‘Explainer: Global energy shortage or a coincidence of regional crises?’

8 | The ‘COVID-Green’ Crisis

‘The economic recovery from the pandemic recession lies behind the crisis, coming after a year of retrenchment in coal, oil and gas extraction,’ says Will Englund in ‘An energy crisis is gripping the world, with potentially grave consequences: How China and Europe are catching the brunt of it,’ in The Washington Post.

• ‘Other factors include an unusually cold winter in Europe that drained reserves, a series of hurricanes that forced shutdowns of Gulf oil refineries, a turn for the worse in relations between China and Australia that led Beijing to stop importing coal from Down Under, and a protracted calm spell over the North Sea that has sharply curtailed the output of electricity-generating wind turbines.’
• ‘ “It radiates from one energy market to another,” said Daniel Yergin, author of The New Map: Energy, Climate, and the Clash of Nations.

“COVID-Green” energy crisis, is what J.P. Morgan researchers are calling it, says The Hill.

9 | The Ball is in Your Court

As someone who doesn’t follow the ins and outs of the crucial battle against climate change, two things here surprised me.

• First, that we are having a global power crisis in itself shows countries are a lot further along in shifting away from carbon-based fuels than I had thought – as a political skeptic, I had figured just lots of promises, not much action. Wrong.
• Second, given the massive brainpower that is dedicated to the issue, I had assumed that the pointy-heads would have built in massive resilience for the transition to clean energy. Wrong again.

As The Economist – its cover headline this week is ‘The Energy Shock’ - points out:

• ‘The danger is that the shock slows the pace of change.’

‘This week Li Keqiang, China’s premier, said the energy transition must be “sound and well-paced”, code for using coal for longer.’

• 'Public opinion in the West, including America, supports clean energy, but could shift as high prices bite.’

‘Next month world leaders will gather at the cop26 summit, saying they mean to set a course for net global carbon emissions to reach zero by 2050.’

• ‘As they prepare to pledge their part in this 30-year endeavour, the first big energy scare of the green era is unfolding before their eyes.’
• ‘The message from the shock is that leaders at cop26 must move beyond pledges and tackle the fine print of how the transition will work.’

Politicians of the world, the ball is in your court.

• Don’t screw it up.