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China’s economic outlook

To the market: China’s power crunch is forcing much-needed energy reform. The sudden emergence of electricity shortages in September has forced Chinese authorities to implement (if only partially) long-delayed reforms to the country’s electricity sector.

That said, further reforms may be necessary to support a more diverse and sustainable electricity sector that can meet the country’s long-term environmental targets.

ABF media

China’s economic growth was comparatively weak in Q3, and the prospect of further shortages due to a cold winter adds downside risk to our forecast for China’s growth in both Q4 2020 and Q1 2021. Both the duration and severity of any supply shortages over this period are highly uncertain. 

In addition, electricity shortages could have flow-on effects to other economies, further stressing already disrupted global supply chains – with delays in production impacting goods supplies and adding upward pressure to inflation. 

Expanded coal imports could see a return to purchases from Australia – with reports suggesting that around one million tonnes of Australian coal that had been stored in bonded warehouses near major ports was released in October. 

ABF media

That said, trade tensions between the two countries remain high, and China could continue to favour other exporters. Longer-term, further deregulation of electricity prices, along with diversification away from coal-fired generation, may be necessary to create a more sustainable sector. 

The latter will be particularly necessary for China to meet its international environmental commitments – which require carbon emissions to peak before 2030 and the country to reach carbon neutrality by 2060 – but would negatively impact carbon-intensive manufacturing – such as steel, cement and chemicals.

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