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China Orders More Coal Production to Solve Power Crisis, Market Calls for Serious Steps to Mitigate Inflation

published: 2021-12-07 15:33

In order to tackle a simmering energy crisis, the Chinese government has abandoned carbon reduction and given orders to expand coal production. Regarding the issue of alleviating energy shortages, official data shows manufacturing in large-scale Chinese factories is currently recovering. The manufacturing index is in an expansion phase, surpassing 50 for the first time in three months. However, new purchase orders remain weak and, under threat from COVID-19 and inflation, the market is forecasting continued instability in the Chinese economy.    

Extreme weather, a spike in energy demand, and strict limits on coal use have dealt three blows to the Chinese national power grid and caused a major dip in industrial output for the months of September and October. In order to solve these problems, the Chinese government is no longer insisting on reducing carbon emissions and has given orders to increase coal production. In mid-November, China set a new record for daily coal production. According to Reuters, China’s current daily coal production capacity is 10 million tons, exceeding demand by 2 million tons.      

Through this successful coal promotion policy, November power shortages were eased and prices for certain raw materials have dropped sharply. A Citibank analyst indicated, the energy problem pushed the cost of raw materials such as aluminum and steel higher, affecting industries including automotive manufacturing and constructing. Although the government intervened strongly to alleviate overall power shortages and cost pressures in certain industries, the crisis has not been averted.  

The continuation of the Winter Olympic and real estate crises and effects of new COVID variants may pressure industrial output in the next few months.  Analysts believe the blue sky effect will be restaged for the Beijing Winter Olympic Games, limiting the production of raw materials in northern China.    

Even though new factory orders have rebounded, results have yet to reach the threshold of expansion and reflects weak domestic demand. Analysts believe the key challenge is the massive pressure exerted on overall demand by the downturn in the real estate market. Real estate and related industries are estimated to account for as much as 30% of China’s GDP.    

The Omicron variant of COVID-19 may become a future problem, especially in the service sector. The market expects service sector demand to rebound at year’s end unless the pandemic worsens again. This is even more applicable considering the Chinese government’s insistence on its zero-COVID policy since the likelihood is very high of a new variant precipitating renewed lockdown measures. 

Another investigation focused on coastal small business has also reflected indications of weakness. The Caixin/Markit manufacturing PMI reached 49.9 in November with monthly output increasing for the first time in 4 months which indicates a recovery in manufacturing supply. However, new purchase orders fell back into a state of contraction, indicating relatively weak demand hindered by the pandemic and rising prices. The extended duration of the COVID-19 pandemic will continue to affect demand with 3Q21 GDP slowdown continuing into 4Q21.

Prices for certain raw materials remain high and industries face high cost pressure. According to industry reports, steel prices fell sharply in November but chemical and electronics prices remained at a high level. Decision makers are urged to take inflation seriously, support small businesses, and focus on issues including rising unemployment, reduction of family income, and weakening consumer purchasing power.  

 (Image:Flickr/vhines200 CC BY 2.0)

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