Workers chopped up coal carts at a coal mine in Mentougou, west of Beijing, where many mines have been shut down, in December 2019, while China struggles to cut CO2 emissions.
Greg Baker | AFP | Getty Images
China needs to increase its coal supplies to avoid an economic slowdown this quarter, but Beijing’s icy ties with Australia could make that difficult, according to investment bank Mizhuo.
The world’s second largest economy is facing a power shortage due to a combination of factors. These include: extreme weather, increasing demand for Chinese exports and a national push to reduce carbon emissions, as pointed out by President Xi Jinping.
China is an industrial power plant and the world’s largest emitter of carbon dioxide. The country generates most of its electricity from burning coal, but the stock of large-scale power plants hit a 10-year low in August.
“While China clearly needs as much coal as it can get its hands on to get you [fourth-quarter] Slowdown due to the tyranny of power shortages have held geopolitical tensions with Australia the most convenient source of high calorific coal from Down Under, “said Vishnu Varathan, head of economics and strategy for Asia and Oceania at Mizuho, in a note Monday.
Indonesia is well positioned to benefit from the demand spillover, but its ability to meet supplies could be a bottleneck, Varathan said.
China faces risks in quickly sourcing coal due to a variety of constraints, including logistics and regulations. This implies that “stuttering in economic activity and the associated kinks in the regional supply chain may not be entirely avoided,” said Varathan.
Some banks have already downgraded China’s growth prospects due to the power crisis.
Many observers appear concerned about a “significant level of energy price shock,” said Varathan.
China’s power shortages could spike the prices of many export goods, which could lead to a modest spike in consumer inflation in advanced economies, said Kevin Xie, senior Asian economist at the Commonwealth Bank of Australia.
Power restrictions will slow economic growth and exacerbate the slowdown caused by problems in Chinese housing construction, Xie said in a statement last week.
“Energy-intensive industries will be hardest hit by electricity rationing. The combined share of the industrial sector in the affected provinces with electricity rationing is approximately 14% of China’s GDP,” he added.
So far, the policy in Beijing has not given any information on whether China will import Australian coal again. According to media reports last week, Indian companies stole around 2 million tons of Australian coal at a discounted price from Chinese warehouses.