China's Power Woes Threaten Growth

The unexpectedly strong growth of China's manufacturing sector could still be undermined by worsening electricity shortages, which also threaten to fuel the country's already worrisome inflation rate. China is facing its worst power shortages since 2004 because government-set prices mean many plants lose money with every spark of electricity they generate. Over a dozen provinces are rationing power to industrial users, and Beijing is struggling to guarantee enough electricity for the Olympics. Top execs from State Grid Corp., which controls most China power lines, have been dispatched to other cities hosting events to guarantee supplies. The price controls on electricity are running smack into China's still-strong growth rate. Recently, China's customs agency reported exports for July were up 26.9% from a year earlier, sharply higher than the 17.6% growth in June. That showed China's exporters are still faring better than many expected. But inability of electricity producers to keep up with demand is having an impact on industry. With the weakening global economy likely to sap demand for China's exports, analysts expect the government to try to head off a worse slowdown by raising electricity prices after the Olympics end later this month. While the price increases will get power plants to produce more electricity, they will add to already-high inflation. They also could end up squeezing corporate profits, which are already hurt by higher wages and raw-material prices. China's measure of producer prices was up 10% in July from July 2007, the National Bureau of Statistics said separately recently the highest increase since 1996. The rise in consumer prices, by contrast, has fallen back somewhat in recent months and is expected to drop below 7% in July. The latest data seemed to only intensify investors' concerns over the economic outlook and corporate profits. China's benchmark Shanghai Composite Index fell 5.2% recently to its lowest level in over 18 months. The government raised prices for electricity, gas and diesel on June 20, but the small increase left electricity producers still in the red. Now, the China Electricity Council, which reps power generators, is lobbying the government to overhaul the pricing system and subsidize the losses its firms have incurred. "We suggest the government, at an appropriate time, continue to resolve the conflicts between prices of coal & electricity to help reverse power companies' loss-making situation as soon as possible," the council said in a recent report. They are still largely unwilling to buy more coal just to sell electricity at a loss. That left coal stockpiles low: The China Electricity Council said inventories at power plants were enough for 11 days of production at the end of June, down from 17 days a year earlier. The government recently tried to intervene in the coal market, where prices were largely liberalized a few years ago, but has had great difficulty enforcing the policy, analysts said. The council expects power shortages to reach about 2% of the nation's total installed capacity of 712 gigs. That low figure masks the severity of the impact in hard-hit areas: the gap in Shandong province, a major industrial center in the east, approaches 1/3 of its capacity. That has caused brownouts and led to rationing for big industrial power users such as mines and aluminum smelters.