Air–conditioners are running full blast in central China as much as they are in Texas or on the Iberian peninsula. As many as 900m Chinese people have experienced record temperatures in recent days; more than 80 cities have issued heat alerts. In Zhejiang province, an important manufacturing centre in the east, some energy-intensive factories have been subject to power rationing. Thermometers in the region hit about 42°C on July 13th. Given the humidity, that feels more like 54°C.
For China’s leaders the roasting temperatures raise fears of a repeat of the energy crunch of last year. As power suppliers struggled to meet demand, many factories were forced to shut down, and some households experienced blackouts. The authorities have vowed to avoid shortages this time. But the turmoil in global energy markets caused by Russia’s invasion of Ukraine and the Chinese government’s own lofty emissions targets present added complications.
The events of both this year and last are laying bare the contradictions between the desire for clean and secure energy and vigorous economic activity. In response, China’s leaders have tried supply-side interventions with varying degrees of heavy-handedness. The experience might prove instructive as governments elsewhere mull market-meddling to counter surging commodity prices.
Last year supply disruptions, together with poor policy, led to China’s worst power cuts in a decade. Officials had restricted the output of many of its coal mines, in line with its climate goals. (In 2020 Xi Jinping, the president, won rare praise from Western observers when he said that the country’s carbon emissions would peak before 2030, and that China would become carbon neutral by 2060.) Then the economic recovery from the early phase of the covid-19 pandemic pushed up the demand for energy. But instead of letting prices rise, state planners maintained strict caps on electricity and some coal prices. Power generators began losing money and some eventually stopped operating. Many miners halted work, too. The resulting power shortages took a severe toll on industrial output.
This time the economy has been battered by Mr Xi’s “zero covid” policy. According to figures published on July 15th, gdp expanded by a mere 0.4% in the second quarter compared with a year earlier. Sluggish economic growth notwithstanding, surging global energy prices and scorching temperatures have revived concerns about the adequacy of energy supply. Officials are seeking to allay those fears ahead of a Communist Party congress in the autumn, at which Mr Xi is expected to receive a third term as the party’s leader. Their approach includes attempts to increase supply and build up stockpiles, as well as some market reforms.
Take coal, which produces 60% of China’s power. Global thermal-coal prices have reached record highs, partly because European countries have reduced their reliance on Russian natural gas. China has this time loosened restrictions on mine production to boost domestic supplies. The country has also been loading up on Russian coal, which is being shunned by the West. Officials are even considering dropping a two-year-old ban on Australian coal imports, according to Bloomberg, a news service.
The National Development and Reform Commission (ndrc), the government’s planning agency, has pressed power companies to lock in long-term contracts with miners and to stockpile at least 15 days’ worth of coal. Nonetheless, with market prices elevated and state caps on electricity prices for end-users in place, generators that are still buying on spot markets could be squeezed again if coal prices continue to shoot up.
China is highly dependent on foreign oil and gas, importing about 75% and 40% of its consumption of each fuel, respectively. Global prices of both commodities surged after Russia invaded Ukraine, though oil has fallen a little recently. Chinese importers have stocked up on crude from Iran, which is under American sanctions, causing inventories to build up in January and April, according to research by Michal Meidan of the Oxford Institute for Energy Studies. China is also buying more oil from Russia at a discount, as Western buyers pull back; in May Russia overtook Saudi Arabia as its biggest supplier of crude.
China’s natural-gas imports are largely locked into long-term contracts, which have so far helped keep prices down. The domestic prices of petrol and diesel, like that of coal, are capped. High global crude prices mean refiners will often make a loss on domestic sales. Strict export quotas stop them from selling more in the international market at higher prices. One Western oil trader says that planners have been leaning on state oil firms to sell even less abroad.
Refiners are therefore incentivised to do fewer runs when prices are high, and to stockpile crude instead. “Export controls are a strategy to keep oil in the country just in case there’s a shortage,” says Zhou Xizhou of s&p Global, a rating agency.
For now there are no shortages. But that does not necessarily mean that the government’s supply-side interventions have had resounding success. A big factor in keeping shortages at bay has been the sorry state of the economy and the associated muting of demand for energy. Some economists believe China’s oil demand could be flat this year compared with last year, or even lower. Optimistic forecasters see the economy recovering towards the end of the year, even as growth slows or stalls in America and Europe. This could lower global energy prices just as China needs to import more.
If factories come roaring back to life earlier than expected, however, then China’s energy policy would face a real test. Miners, refiners and power generators could respond to price caps and export bans by reducing supply. A particularly cold winter could force buyers of gas into the spot market, where prices have rocketed. And officials would start to feel the heat. ?
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