In December 2019, workers removed coal carts from a Mentougou coal mine, west of Beijing. Many other mines have been closed as China struggles to reduce carbon emissions. AFP
China must increase its coal supply in order to avoid an economic slowdown. However, Beijing's icy relations to Australia could make it difficult, according to Mizhuo, an investment bank.
A combination of factors is causing a power crisis in the world's second largest economy. These include extreme weather, a surge in Chinese exports, and a push by the nation to reduce carbon emissions as outlined by President Xi Jinping. China is a major industrial powerhouse and one of the largest emitters of carbon dioxide on the planet. China's electricity is generated mainly by burning coal, but its inventory of power plants fell to a 10-year low in august. "While China clearly needs all the coal it can find to avoid a slowdown in the fourth quarter due to the tyranny and rolling power shortages," Vishnu Varathan (head of economics strategy for Asia and Oceania at Mizuho), stated in a Monday note.
China stopped purchasing coal from Australia, which was once the largest exporter of the commodity to China. After Australia supported a call for an international inquiry into China’s handling of coronavirus, trade tensions between the countries escalated. China then turned to Indonesia, Mongolia and Russia to make up the difference. According to reports, the supply agreement with China for Indonesian coal miners was worth $1.5 billion.
Varathan stated that Indonesia is well-positioned to take advantage of the demand spillover. However, its ability to fulfill shipments could be a bottleneck. China is not able to procure coal fast due to many constraints, including logistics and regulations. Varathan stated that this could lead to a slowdown in economic activity, as well as kinks in the regional supply chain.
Inflationary pressure
Due to the power shortage, some banks have already downgraded China’s growth prospects. Varathan stated that many observers are concerned about the possibility of a "significant amount of energy price shock." According to Kevin Xie (senior Asia economist at Commonwealth Bank of Australia), China's power crisis could cause a rise in the prices of many export goods, which could lead to a modest increase in consumer inflation for advanced economies.
