By Samuel Shen and Alun John

SHANGHAI (Reuters) – China’s power supply crunch, that has shut factories across the country, may pose a much bigger threat to the economy than the debt crisis at Evergrande Group, prompting investors to shun industries vulnerable to power shortages such as steelmaking and construction.

China’s power crisis is due to tighter emissions standards, a shortage in coal supply and strong demand by industry. This has led to widespread bans on consumption. Power shortages have forced factories to close their doors and mandates from the government to reach energy- and carbon-reduction goals.

Nomura and Goldman Sachs (NYSE 🙂 have reduced their projections of Chinese economic growth for this year. While shares in Chinese shipping, chemical, and carmakers companies are down, renewable energy stocks have increased.

Investors fear that the scale of potential problems will outweigh any liquidity issues at Evergrande, a property developer, which has liabilities totaling $305 million. This month, property stocks and bonds were hampered by the financial troubles of Evergrande.

“The Evergrande crisis has been unfolding for quite some time, and I think the risks will be defused in a targeted way,” said Yuwei, hedge fund manager at Water Wisdom Asset Management.

Yuwei stated that the outages in electricity supply would disrupt the equilibrium between demand and supply, causing a major disruption to the consumption sector. Yuan indicated that “the fallout will be more difficult to control.”

Yuan is currently focusing his investment on hydropower firms such as Sichuan Chuantou Energy Co. He also shorts steelmakers, coal-fired power producers and other metals.

OVER-REACTION

In contrast, some property shares, hit hard by the Evergrande crisis, have started to bounce back, as some investors bet the market has over-reacted.

Rob Mumford (Hong Kong-based investment director at GAM Investments) said, “We have been overweight in developers but have gradually been buying into that weakness.”

While there are clear distressed valuations, companies are not currently in crisis.

After hitting its lowest point in more than four years, the index of mainland China-listed property stocks increased 6.4% Tuesday. A Shanghai-listed real estate stock index also saw a 3% increase on Tuesday.

China’s central bank pledged to protect homeowners exposed to housing market risks, but did not include Evergrande. It also injected additional cash into its banking system.

NO POWER REBOUND

However, so far at least, few investors have been tempted to go bargain-hunting among companies hit by the power shortage, fearing the situation could deteriorate further

An index tracking non-ferrous metal makers, such as and aluminium companies, is down 15% this month. Shares in China’s biggest steelmakers have plunged – for example, Baoshan Iron & Steel Co and Angang Steel are both down over 20% since their mid September recent highs.

This is not a isolated problem.

The power outages have been widespread in twenty provinces, including Zhejiang, Jiangsu and Guangdong. This has put pressure on the earnings of companies.

Production of steel, aluminium and cement, as well as infrastructure construction, would be immediately affected by the power cuts and supply restrictions, Morgan Stanley (NYSE:) analysts wrote in a report published on Monday, adding the impact could ripple downstream to hit more sectors such as shipping and automobiles.

Yang Tingwu is the vice-general manager at hedge fund house Tongheng Investment. He stated that he prefers firms with fewer factories because China’s restrictions on carbon and energy use “is bad news” for the economy.