5 May 2011
China Macro Strategy
Power shortage:
impact is manageable
Wenjie Lu
Research Analyst
(+852) 2203 6187
wenjie.lu@db.com
Jun Ma, Ph.D
Chief Economist
(+852) 2203 8308
jun.ma@db.com
Deutsche Bank AG/Hong Kong
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MICA(P) 007/05/2010 Company Global Markets Research
Over the last week a number of provinces in east and central China have reported
power cuts and the State Electricity Regulatory Commission warned about the risk
of widespread power shortage in this summer. In this note, we analyze the causes
of the power shortage and its likely development in the coming months. We
conclude that although power shortage may get worse in coming months, its
magnitude and impact will likely be manageable.
Our key finding is that the impact of power shortage on annual GDP this year will
likely be less than 0.3%. This conclusion is based on a comparison with 2004,
which suffered the worst power shortage in two decades. Even in 2004, the
power shortfall resulted in an estimated decline in GDP by only 0.6%. According
to estimates by the State Electricity Regulatory Commission, the power shortfall
this year as a percentage of total power supply will likely be only half of that in
2004.
We see four specific reasons why the ongoing power shortage, which should last
for the next three to four months, is unlikely to result in a sharp drop in production
(i.e., an “economic hard landing”). The reasons are: 1) the government will likely
raise on-grid tariffs to mitigate IPPs’ losses, and will also put strong pressure for
state-owned power suppliers to produce regardless of profitability; 2) the current
power capacity gap, if any, is small, as utilization is currently at the normal rate of
60%; 3) the recent modest PMI readings suggest that industrial demand for
power is unlikely to surge in the summer; and 4) nationwide water power
utilization and the upstream water level of the Yangtze River are normal, giving no
obvious reason to worry about a reduction of hydro power.
Together with concerns on inflation and policy over-tightening, power shortages
have now become an additional reason for many investors to sell or avoid China.
We believe all these concerns are overdone. The ease of power shortage in
August-September, together with the decline in yoy inflation and policy risks by
then, should support a positive market outlook in the coming three to four
months.
At sector level, we believe that power shortage tends to be positive for the coal
sector, as it generates upward pressure on spot coal prices. In four or five of the
historical cases of power shortage, the coal sector outperformed the index.