China’s power crisis threatens a troubled manufacturing industry, PMI data shows

A government survey of manufacturing activity released Thursday fell to 49.6 in September, from 50.1 in August. Any reading below 50 suggests a contraction – and in this case it was the first time the official survey showed a decline in activity since the Covid-19 pandemic began.

China’s National Bureau of Statistics, which added Thursday that high-energy companies are not thriving, factories are being damaged by rising energy costs.

“The big picture is that the industry was getting out of hand before the recent power shortages,” wrote Julian Evans-Pritchard, chief China economist at Capital Economics, in a research note on Thursday.

But this work requires tons of electricity, and therefore huge amounts of coal. The electricity shortage began to bite in June but has worsened since then as coal prices skyrocketed and China’s provinces tried to meet Beijing’s carbon emissions reduction targets.

The worsening power shortage has triggered blackouts for households and forced factories to cut production – a threat to the country’s vast economy that could put even more strain on global supply chains.

According to state media, companies in the country’s industrial core countries have been asked to limit their energy consumption in order to reduce electricity demand. The problem prompted China’s State Grid Corporation to say this week that it will “do whatever it takes to fight the tough battle for electricity,” and make every effort to secure home consumption.

Evans-Pritchard noted that the latest polls came before most of the effects of the recent power shortages were felt.

“Since then, electricity shortages have worsened,” he added, noting media reports suggest that factories in more than 20 provinces have had to cut production.

Thursday’s data weren’t all bad. A private manufacturing activity survey, the Caixin Purchasing Managers’ Index, rose from 49.2 to 50, indicating a stable level of activity in September compared to a decline in August.

And an official index of non-manufacturing activity rose to 53.2 from 47.5 in August, a sign that the service sector is recovering. Falling consumer demand has been a cause for concern in China this year.

But the overall economic picture is worrying. The analysts at Nomura and Goldman Sachs have recently cut their forecasts for Chinese growth in 2021 due to the power shortage. Goldman analysts this week noted that there is “significant uncertainty” for the final quarter of the year as the Chinese economy is already at risk from the debt crisis of the contested conglomerate Evergrande.

“There is still room for further recovery in service activity as the pandemic disruption subsides,” wrote Evans-Pritchard. “But the industry is looking for more weaknesses.”

– CNN’s Beijing office contributed to this report.

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