China’s manufacturing industry is in trouble

Factories in China are struggling at a time when the world’s second largest economy has to contend with yet another concern: a growing power supply crunch.

A government survey of manufacturing activity released Thursday fell to 49.6 in September, down from 50.1 in August. Any reading below 50 indicates contraction – and in this case, it was the first time the official survey showed activity shrinking since the Covid-19 pandemic began.

Factories are getting dinged by the soaring cost of energy, according to China’s National Bureau of Statistics, which added Thursday that high-energy businesses have not been prospering.

“The big picture is that industry was coming off the boil even prior to the latest power shortages,” wrote Julian Evans-Pritchard, senior China economist at Capital Economics, in a Thursday research note.

A boom in construction and manufacturing drove much of China’s economic recovery this year, and continues to play a vital role in growth.

But that work requires tons of power and thus massive amounts of coal. Power shortages began to bite in June but have worsened since then as coal prices have soared and China’s provinces have tried to meet Beijing’s targets to reduce carbon emissions.

The worsening power crunch has triggered blackouts for households and forced factories to cut production – a threat to the country’s vast economy that could place even more strain on global supply chains.

Companies in the country’s industrial heartlands have been told to limit their energy consumption in order to reduce demand for power, according to state media. The problem prompted China’s State Grid Corporation to say this week that it would “go all out to fight the tough battle of power supply,” making every effort to secure residential consumption.

Evans-Pritchard noted that the latest surveys took place before most of the impact from the latest power shortages was felt.

“Since then, power shortages have intensified,” he added, pointing out that media reports suggest factories in more than 20 provinces have had to scale back production.

Thursday’s data wasn’t all bad. A private survey of manufacturing activity, the Caixin Purchasing Managers’ Index, rose from 49.2 to 50, indicating stable levels of activity in September compared to a decline in August.

And an official index of non-manufacturing business activity rose to 53.2 from August’s 47.5, a sign that the services sector is recovering. Flagging consumer demand has been a concern in China this year.

But the overall economic picture is troubling. Analysts at Nomura and Goldman Sachs trimmed their forecasts for Chinese growth in 2021 in recent days over the power shortage problems. The Goldman analysts noted this week that there’s “considerable uncertainty” headed into the final quarter of the year, given that the Chinese economy already faces risks because of the debt crisis at embattled conglomerate Evergrande.

“There is still some scope for a further recovery in services activity as disruptions from the pandemic ease,” Evans-Pritchard wrote. “But industry looks set for further weakness.” (CNN)