By Shivani Singh and Min Zhang

BEIJING (Reuters) – China’s power crunch, caused by tight coal supplies and toughening emissions standards, has triggered a contraction in heavy industry across several regions and is dragging on the country’s economic growth rate, analysts said.

China promised to decrease energy intensity by around 3 percent in 2021, in line with its climate goals. Recently, provincial authorities have increased their enforcement of emissions limits after 10 out of 30 of China’s mainland regions failed to achieve their targets in the first half.

The power crisis ahead of winter heating season has been caused by higher coal prices and tight supply.

“Power cuts have come as China’s carbon regulatory reset has collided with its industrial boom amid the pandemic,” said Morgan Stanley (NYSE:) analysts in a note to clients on Monday.

If the production cuts continue, they could reduce GDP growth by 1 percent (percentage point). This is due to materials production.

China thermal coal prices https://fingfx.thomsonreuters.com/gfx/ce/mopankbamva/ChinaSeasonalIndustrialProducts.png

China’s economy saw a rapid recovery from the COVID-19 pandemic last year, but recent data have pointed to a slowdown in the world’s second-largest economy.

Morgan Stanley analysts stated that the production curbs have affected the steel, cement, and aluminium industries. 29% of the national cement production was suspended, and that paper and glasses could also be affected by these supply interruptions.

China’s seasonal output of key industrial products https://fingfx.thomsonreuters.com/gfx/ce/gdpzyqjlwvw/ChinaThermalCoalSep272021.png

“The power-supply shock in the world’s second-biggest economy and biggest manufacturer will ripple through and impact global markets,” analysts at Nomura said in a research note to clients sent on September 24.

According to the note, “The supply shocks have forced us to lower our year-on–year Q3 GDP growth forecasts from 5.1% to 4.4% to 4.7%” and “4.0% to 3.0%,” respectively.

Nomura has reduced its 2021 gross domestic products (GDPs) forecast by 7.7%, from 8.2%. China set its 2021 growth goal at over 6%.

A China-based analyst stated that the main reason power cuts occur because of a shortage in coal supplies. He noted that China’s domestic coal production was restricted by strict safety standards, while Indonesian imports were slowed due to bad weather. Because the analyst could not be identified, the source was not permitted to comment to the media.

China is the largest energy user in the world and a major source of climate-warming greenhouse gases. It has stated that it wants to reduce carbon emissions by reducing them to zero net by 2060.

SPILL OVER

The power pinch, which has been impacting manufacturers in key industrial hubs on the east and south coasts for the past several weeks, is now spilling over into the residential sector in parts of the northeast.

Liaoning province stated that its power generation has declined substantially since July. The supply gap has widened to an “extreme level” due to declining electricity prices in other areas and wind power. The power cut was extended to residential areas from the industrial sector last week.

The city of Huludao in the province has asked residents to not use high-energy electronics like water heaters and microwaves during the peak power use periods from 10:00-12:00 am (0200-0400 GMT), 3:00-4:00 p.m. and 07:00-08:00 p.m.

A resident of Harbin city in the northeast Heilongjiang province told Reuters that many shopping malls were closing earlier than usual at 4 p.m..

A wide variety of companies have been affected by the impact of power cuts in the country, including those that produce aluminium, chemicals, dyes and furniture, as well as soymeal and other chemical producers.

Nomura said that the world’s markets would feel the effects of the lack of supplies from toys, textiles and machine parts.

To try to alleviate the shortages, China’s National Energy Administration (NEA) has told coal and companies to increase output to ensure the country has sufficient energy supplies to keep homes warm during winter, the regulator said on Sunday.

China’s major coal producers met last week in an effort to reduce prices and alleviate shortages.