Evergrande and China's power crisis, what next?

circadian

It seems that the Chinese economy is going to have to weather a very, very difficult winter. What are the possible outcomes?

The energy crisis that seems to be happening in most places is having a profound effect in China, with reports of factories shutting down and rolling blackouts across the country. This is bound to be hitting productivity hard and I imagine it will continue to do so as it gets colder and energy will be required to keep the populace warm and in comfort, putting industry first would add more strain to the already growing discontent within the country. Banning crypto mining earlier in the year seems to indicate that they knew there would be a shortage in the coming months and they tried to get ahead to the curve, rather than an outright attack on cryptocurrencies in general.

Then we have Evergrande. Is this a one off and fixable problem? I doubt it, Evergrande reached this point as a result of systemic problems in the Chinese real estate market (of course the 3 red lines has solidified this). Basically, property and related industries in China account for about 30% of their GDP. The Chinese government has been injecting cash into the economy to facilitate liquidity but in reality this must be devaluing the Yuan not to mention the increasing risk of Evergrande defaulting, which is looking increasingly likely.

This may just be pure coincidence but the Yuan Dollar rate and subsequent fall matches pretty much the same trend in Evergrande from July 2020. At the minute, international investors like Blackrock, HSBC and UBS have been increasing their ownership of Evergrande debt since the start of the year, and looking at Blackrock in particular, they seem to be on a very definite downtrend since the start of September, most likely as a result of exposure to Evergrande.

Again, the banning of cryptocurrencies which happened about a week ago would lead me to believe that the Chinese government is trying to prevent people from investing in those markets because the fallout from a property crash is going to be significant, they'll need as much Yuan to be moving in the market as possible, not going into cryptocurrencies.

I'm sure I've missed many things other people have picked up on, but this does seem to be a much larger crisis than is currently being reported and I find the correlation of their banning crypto mining and trading with power shortages and economic woes interesting.

bob mcbob

This is a really interesting article in the Guardian about the causes of the power crisis.

https://www.theguardian.com/world/2021/sep/29/how-bad-is-chinas-energy-crisis

A few sections stand out

"Energy companies are, in effect, rationing electricity to industrial and domestic users under orders from president Xi Xinping’s officials to not pass on the higher costs from rising prices of imported coal."

"Beijing is concerned that higher energy prices will spark an increase in inflation that in turn will depress living standards and cause social unrest. China expert and head of Enodo Economics, Diana Choyleva, said higher inflation had the capacity to hurt all household finances and unify opposition to Xi. Rationing in the worst affected areas of the north-west is preferable to a broader price increase, she said."

Things must be really bad when it is considered a better option to ration power to 100M people than make all people pay the real cost of power. The comment about "opposition to Xi" makes it doubly interesting - any decision made in China now can be seen in light of this (Xi's survival).