Reuters File Photo: September 25, 2020, depicts a power pylon and a power line at a power plant near Yumen, Gansu Province, China. Reuters / Carlos Garcia Rawlins
Written by Samuel Shane and Alun John
SHANGHAI (Reuters) – China’s power supply crisis, which has shut down factories across the country, could pose a much bigger threat to the economy than the Evergrand Group’s crisis, prompting investors to abandon power-risk industries such as steel making and construction.
China is facing a power crisis due to a lack of coal supply, tight migration standards and strong demand from manufacturers and the industry, which has led to widespread restrictions on its use. Factories have been shut down due to the power crisis and government orders to meet energy and carbon reduction targets.
Goldman Sachs (NYSE 🙂 and Nomura have consequently revised their forecasts for Chinese economic growth this year. Shares of Chinese chemical manufacturers, carmakers and shipping companies fell, while renewable energy stocks rose again.
Investors believe the potential level of trouble could dwarf any fruit from the liquidity problem at Evergrande, a ব 305 billion asset developer that has swept property stocks and bonds this month.
“The Evergrand crisis has been unfolding for some time, and I think the risks will be targeted,” said Yuwei, hedge fund manager at Water Wisdom Asset Management.
He said the power outage would upset the supply-demand balance, which would directly hit consumption and the real economy. “The fruit is more likely to go out of control,” Yuan said.
Yuan’s current investment position is to bet on hydropower companies such as SDIC Power Holdings and Sichuan Chuantu Energy Co., while shortening steel makers and coal-fired power producers.
In contrast, some property shares have begun to recover from the severe damage caused by the Evergrand crisis, as some investors bet that the market has reacted excessively.
“Our developers weigh less, but slowly we are buying into this weakness,” said Rob Mumford, Hong Kong-based investment manager at GAM Investments.
“There is definitely a reassessed appraisal for companies that are not currently in crisis.”
An index of Hong Kong-listed mainland China property stocks added 6.4% on Tuesday after reaching a four-year low last week, and an index of Shanghai-listed real estate stocks also rose 3% on Tuesday.
The rally came after China’s central bank pledged to protect consumers who come into contact with the real estate market, without mentioning Evergrand in a statement posted on its website on Monday and further injecting cash into the banking system.
No power rebound
However, so far, at least, a small number of investors have been tempted to bargain among companies affected by the power shortage, fearing the situation could get worse.
This month and an index of non-ferrous metal manufacturers such as the aluminum company fell 15%. Shares of China’s largest steelmakers have fallen – for example, Baoshan Iron and Steel Company and Angong Steel have fallen below 20% since their mid-September highs.
The problems are widespread.
Twenty provinces, including Guangdong, Zhejiang and Jiangsu manufacturing centers, have implemented electricity connections since mid-August, putting pressure on companies’ earnings.
The production of steel, aluminum and cement, as well as the construction of infrastructure, will be immediately affected by power cuts and supply restrictions, Morgan Stanley (NYSE 🙂 Analysts wrote in a report released on Monday that the impact could spread to lower sectors to hit more sectors such as shipping and automobiles.
Yang Tingwu, vice general manager of hedge fund house Tongheng Investments, said he now prefers companies, including a few factories, because China’s ban on energy and carbon emissions is “bad news for the overall economy in the near term.”