China's Energy Crisis: Impacts on the Global Economy
The soaring prices of thermal coal used to produce electricity caused the second-largest economy in the world, China, to suffer a significant energy crisis in the past few weeks, leaving many Chinese in the dark. Multiple businesses were forced to be closed, factories were told to reduce output, lifts and traffic lights were not working, many Chinese even complained on various social media platforms about the lack of heating. It was the worst electricity crisis China had faced in a decade. The timing for this energy crisis could not be any worse as China was rebuilding its economy after the COVID-19 pandemic while preparing to host the Winter Olympics game and fighting off the collapse of some of its largest companies.
The origin of China's energy crisis can be traced back to 2020, when China decided to ban coal imports from Australia due to the strained relationship between the two countries.
After Australia publicly asked in April 2020 for a WHO investigation in China on the origin of COVID-19, China felt offended and took a series of trade actions against Australian export sectors. As a result of the trade war between the two countries, ships that held a large supply of coal from Australia were stranded for almost a year at sea because China refused to accept the imports from Australia. However, this move caused a significant backlash in China's coal supply as the Chinese economy was heavily dependent on Australia, China's largest coal provider historically, to provide coal for the country's electricity and power.
As the demand for Chinese products increased worldwide, the electricity demand in China also increased, resulting in rising demand for coal. However, since there was only limited availability of coal after China declared war on coal imports from Australia, the price of coal skyrocketed.
To manage inflation, the Chinese government had control over the electricity prices within the country. Although this did eliminate the problem of monopoly's pricing power, it caused another issue. Because of the price regulations, coal-fired power plants struggled to maintain a profit due to the surging coal prices. Higher coal prices meant higher expenses, but since the price of electricity was regulated, manufacturers could not sell their electricity at a higher price. Unwilling to operate at a loss, many plants decided to reduce their output, and some even chose to stop producing at all, causing most of China to have many dark nights and the manufacturing in China to slow.
Coal-fired power plants in China
Image Source: S&P Global
To cope with the recent power shortages, the Chinese government is reviewing the price ceiling on electricity, hoping that this will lessen the demand for electricity for industrial consumers, provide power plants with more incentives to generate power, and secure and stabilize the electricity generation in China. China is also considering increasing imports of foreign fuel, despite its strained trade relations with countries like the U.S. and Australia. China has called on coal miners to boost output in this last quarter of the year as well, hoping that the sector can deliver over 12 million tons of coal a day for these next two months. If the coal output cannot rise faster to keep pace with the demand, China might see a significant winter power shortage accompanied by stagflation. Energy prices might also rise higher and prompt most manufacturing industries to fold, heavily crippling the Chinese economy.
With the increasing demand for Chinese goods worldwide as the post-COVID-19 demand hit, China's factories require more significant energy supplies to service its large production. Increasing output means increasing input, and electricity is a crucial input in today's machine-driven manufacturing society.
A factory in China that uses machines and robots to install car bodies
Image Source: China Macro Economy
As one of the largest manufacturers in the world, China's energy crisis is likely going to heavily affect the global supply chain, especially towards the Christmas shopping season. China's current state might also cause significant global inflation as people rush to buy items that they think will soon run out if China's production slows. According to an estimate from Goldman Sachs, as much as 44% of China's industrial activity has been affected by power cuts. It now expects China to expand only 7.8% this year, down from its previous prediction of 8.2%. The events behind China's ban on Australian imports also reveal that Australia has a stronger impact on the Chinese economy than most people thought as China relies heavily on coal, while Australia has the best quality coal.
With so many moving parts, China's energy crisis is an interesting issue that is hard to see what will happen. But one thing is for certain -- there is little room for mistakes from China as one misstep can not only negatively impact the Chinese economy but also the world economy.
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