China power cuts bite: Factory output shrinks after 18 mnths

Goldman slashes its Q3 growth forecast to 0%, from 1.3% earlier

Activity in China’s vast factory sector contracted in September for the first time since the pandemic began, the latest sign of deceleration in the world’s second-largest economy.

The drop in the official manufacturing purchasing managers’ index below the 50mark, which signals a decline in output, shows the damage a widespread electricity crunch is having on growth.

Goldman Sachs has lowered the year-on-year forecasts for China's economy to 4.8 per cent in the third quarter and 3.2 per cent in the fourth quarter of 2021 compared to 5.1 per cent and 4.1 per cent a year ago, respectively.

On a quarter-on-quarter basis, it has slashed its forecast for China to 0 per cent in the third quarter from a previous forecast of 1.3 per cent, and 6 per cent in Q4 from the earlier 8.5 per cent.

Alongside tough measures to rein in the property market, the latest developments have led economists to pare back full-year growth predictions below 8 per cent and warn that Beijing could be willing to tolerate a sharper slowdown as it tries to reform its economic model.

The problem for the economy is that manufacturing and property investment have been the main drivers of growth since the pandemic hit, while consumption growth remains relatively weak with households still cautious about travel and eating out.

Electricity shortages, which have caused power cuts across China this week,

combined with property curbs are “a double whammy on the key drivers of growth this year,” said Bo Zhuang, China economist at Loomis Sayles Investments Asia. “A further growth slowdown is inevitable.”

Power Crunch

Chinese factories in 21 provinces have been hit by power cuts in recent weeks, largely driven by a spike in coal prices that made it unprofitable for power plants to sell electricity at fixed-prices. The impact was in the official manufacturing purchasing managers’ index, which declined to 49.6 from 50.1 in August, below the 50 median estimate in a Bloomberg survey of economists. Beijing has scrambled to solve the problem by allowing power companies to raise prices and trying to funnel more coal to the sector.

Those efforts could get production going again in many factories, but that relief might not come for weeks.

Beyond that, Beijing is signalling that it wants highly energy-intensive producers, like steel and chemical factories, to reduce output for the rest of the year, as it tries to meet environmental targets.

Property slowdown

Evergrande is facing a debt crisis that’s roiled financial markets and drawn global attention. The company only accounts for about 4 per cent of China’s property sales, so economists are more worried about a broader slowdown in real-estate investment prompted by the government’s efforts to slow the pace of mortgage lending and curb financing for property developers.