[Economics] A new crisis that China is exporting to the global economy... after the Evergrande

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China may be mired in an energy supply shock that could hit Asia's largest economy just as the Evergrande crisis sent shockwaves through its financial system.

The new crackdown on energy consumption is driven by rising electricity demand, rising coal and gas prices, as well as tough targets from Beijing to cut emissions.

The new crisis will first hit the country's giant manufacturing sector: from aluminum smelters to textile producers and soybean processing plants, factories are being ordered to limit activity or - in some cases - shut down completely.

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Nearly half of China's 23 provinces have failed to meet the energy consumption targets set by Beijing and are now under pressure to limit their use. Among the hardest hit are Jiangsu, Zhejiang and Guangdong - three industrial powers that account for nearly a third of China's economy.

"With market attention now focused on Evergrande's restrictions, and Beijing's unprecedented restrictions on the real estate sector, another major supply-side shock may have been underestimated or even missed," Nomura Holding analysts, including Ting Lu, warned in a note.

Despite the impact of Corona on shutdowns and reduced coal and gas production, China's energy crisis is partly of its own making, with President Xi Jinping trying to ensure blue skies at the Beijing Winter Olympics next February and showing the international community that he is serious about decarbonizing the economy.

China's coal futures more than quadrupled in the past month, repeatedly breaking new records as concerns about mine safety and pollution constrain domestic production while it continues to ban shipments from Australia's largest supplier.

Meanwhile, natural gas prices from Europe to Asia have soared to seasonal highs as countries try to outbid each other for rapidly depleting supplies.

And in China's previous winter power surges, many turned to diesel generators to plug power shortages from the power grid. The risk in the year is that government policies have limited the power industry's ability to ramp up production to meet increased demand, said Zeng Hao, chief expert at consultancy Shanxi Jincheng Energy.

Yunnan Aluminum, a $9 billion producer of metals used in everything from cars to soda cans, has scaled back production due to pressure from Beijing. The shock also reached the giant food sector in China. Soybean crushers, which process the crop into edible oils and animal feed, were ordered to shut down this week in Tianjin.

A number of smaller companies have also started notifying the exchange that they have received orders to curb or stop activity. While it may be overlooked by large foreign investors who do not cover these companies, the end result could be a shortage of everything from textiles to electronics components that can disrupt supply chains and eat up the profits of a host of multinational companies.

Corporate orders
In Jiangsu, a province near Shanghai with a large economy like Canada, steel mills have closed and some cities have turned off their street lights. In neighboring Zhejiang Province, about 160 energy-intensive enterprises, including textile enterprises, have been closed. While in Liaoning in the far north, 14 cities ordered emergency power cuts, which were partly blamed on rising coal prices.

"Energy restrictions will spread and affect global markets," Ting said. "Soon global markets will feel the tightness of supplies from textiles and toys to spare parts for machines."

The downsizing poses a new threat to the economy, which is facing multiple pressures after a V-shaped recovery last year. As with energy differences in Europe, this pressure poses a challenge to policymakers, how to pursue environmental goals without harming still-fragile economies. Beijing is targeting full-year growth of 6% after growth of 12.7% in the first half.

"Policy makers seem willing to accept slower growth for the rest of this year in order to meet the carbon emissions target," said Larry Hu, head of China economics at Macquarie Group. “The GDP target of more than 6% can be easily achieved, but the emissions targets are not easy to achieve given the strong growth in the first half.”