First Evergrande, Now Imminent Energy Catastrophe Worrying Analysts

First Evergrande, Now Imminent Energy Catastrophe Worrying Analysts

The Evergrande Crisis had sent shock waves to the major stock markets of the world. Not only does it aggravate the inverters woes but leaves them in limbo. 

Chineses property-develop major firm- Evergrande owes more than $300 billion and has been excused for its failure to stump up key loan payments. Its investors and suppliers hail from all around the world.

In recent weeks, in response to mass protests and cascading global markets, Beijing has shifted its focus on limiting the adversity emerging from the crisis and protecting the interests of the ordinary people, though the government has maintained a distance from giving any official statement on Evergrande fall out.

The People’s Bank of China in a recent statement expressed the desire to “maintain the healthy development of the real estate market and safeguard the legitimate rights and interests of housing consumers.” The bank did not point out Evergrande categorically, but it can be correlated with the bank pumping in the cash- 100 billion yuan (approximately $15.5 billion) in the financial system to help the situation not slip out of hands. 

Almost 200,000 people work in Evergrande, and it is believed to be the source of more than 3.8 million jobs each year, thus many of the analysts lock horns over its exasperating after effects. 

Some analysts see potential shockwaves in sight across the world’s second-biggest economy if the steps are not taken to contain the situation on time. 

Chinese real estate, and its related industries, accounts for as much as 20% of the urban workforce in the country, according to Christina Zhu, an economist at Moody’s Analytics.

In a recent development, Evergrande raised $1.5 billion to lower down its towering debts. Also, the real estate developer has decided to sell off a part of its stake in a local bank for about 10 billion yuan (about $1.5 billion). For a temporary mode, its shares went up nearly 15% in Hong Kong.

The company will be vending a 20% stake in Shengjing Bank to state-owned Shenyang Shengjing Finance Investment Group. Let’s not forget that over a third of Shengjing Bank is under the control of the property giant, and Evergrande’s troubles have already added much stress to it.

In a stock exchange filing, Evergrande emphasized that its “liquidity issue has adversely materially affected Shengjing Bank,” and the parties have consented to use the proceeds to solve “financial liabilities” between them. Despite the selloff, the conglomerate will clutch a 14.75% stake. 

On seeing such efforts made by the domestic players of the East Asian country, Wall Street built up a consensus that it will be exaggerating to think that Evergrande will cause a huge global shock. It can be too premature to think this way, if Evergrande will not be the major attributing factor in plunging down the stocks all around the world, then a potential energy crisis will surely serve the purpose. 

On the Evergrande crisis– Kevin Lai, chief Asia economist at Daiwa Capital Markets, as reported by Business Insider, said that while the homeowners’ interests will be protected by the government, “the shareholders, the creditors, the bondholders will suffer.” 

China energy crisis

Dark Clouds Of Energy Crisis In China May Hover Over World Economy Soon

Tracing back to June, China had called for power rationing– Employing methods designed to conserve energy posing as an alternative to price mechanisms in energy markets. Because of its severe economic implications, it is usually seen as the last resort. Load shedding is one of its common forms.

What happened in China was–Factories in many provinces including Jiangsu, Zhejiang and Guangdong — which together contribute to almost a third of the nation’s gross domestic product, were directed to conserve power, forcing factories to lower output and even suspend operations for a time being. The situation transgressed from the factories and reached households in certain provinces. People were asked to restrict their air conditioner and elevator usage that led to worsening the situation, ultimately causing blackouts in many cities.

Behind the energy crisis, the soaring price of natural gas and scantness in its supply have been key contributors. 

China, one of the worst emitters of pollutants, has shifted its dependency on cleaner fuels in recent years, but its reliance on coal continues to make new heights.  

“Global markets will feel the pinch of a shortage of supply from textiles, toys to machine parts,” said Lu Ting, chief China economist at Nomura Holdings Inc in Hong Kong. “The hottest topic about China will very soon shift from “Evergrande” to “Power Crunch.”

Owing to the energy crisis, iPhone assembly operations in China had to reduce their energy consumption, Pegatron Corp., a key partner for Apple Inc. , said this week. The company said it’s complying with the local government policies and adopting required energy-saving measures.

According to sources familiar with the issue, the companies responsible for making the Apple iPhone have so far avoided significant production cuts and appear to be enjoying preferential access to electricity to keep operations running.

People’s Daily, the official newspaper of the Chinese Communist Party, said in a Sunday editorial that the energy cuts will force companies to raise the cost of goods for Chinese consumers. In addition, the northeast Liaoning province government has urged local regulators to prevent power curbs from affecting the households and factories operations, state broadcaster CCTV reported.

Juxtaposing the China energy crisis, Europe, on the other hand, is facing an energy crisis owing to the slow supply of natural gas and its rising prices. In recent months, wind turbines could not produce energy as much as it is sufficient to satisfy the demand of their market, which led to higher reliance on fossil fuels. 

Inventory levels of natural gas fell to historic lows as during summer power consumption rose drastically. The situation may worsen when the winter sets in, as for heating homes and water during winter months, natural gas demand across Europe will also rise. Similar situations may also terrorise the Chinese if their energy crisis woes are not addressed and curtailed. In the eastern Asian state, the government-induced drive to cut pollution ahead of the Beijing Winter Olympics has appalled supplies while natural gas and coal prices have drastically impacted energy producers.

The energy crunch will further slow down the acceleration of the Chinese economy as the country is already dealing with stringent virus control measures and stricter manoeuvres to rein in the property market. 

Nomura Holdings Ltd, China International Capital Corp. and Morgan Stanley have reduced the country’s GDP forecast and also cautioned of lower growth owing to power disruptions.

For many economists, the energy shortage poses the biggest hindrance to the growth of the Dragon. Goldman Sachs has slid its second-half growth outlook from 8.2% to 7.8% previously this week. The investment bank’s analysts see possible shocks on both the demand and supply sides.

The energy shortages have hit production in several energy-intensive industries, which augments the “already significant downside pressures in the growth outlook”, as per Goldman Sachs.

“Based on available high-frequency data and news flows, we believe this ongoing double shock will very likely lead to a growth double-dip in Q3 (the first dip was the 8.7% q-o-q decline in Q1 2020),” said a team of economists led by Ting Lu.

Nomura also brought down the 2022 growth forecast to 4.8% from 5.1%, with 2023 just measuring the growth of 4.7%. The team said, “Even with these cuts, we see the risks to our forecasts skewed to the downside.”

The governmental policies of a state play a crucial role in either pacifying or scathing the situation. In the case of China, the economic upheaval is a result of President Xi Jinping’s policies.

The sudden regulatory push to reduce the debts across the economy resulted in the giving birth to crises like Evergrande. The ambitious move of “common prosperity” ahead of the elections has also weighed on the US-listed Chinese companies. In the light of this, companies like Pinduoduo, Alibaba, Tencent came forward and showered their profits or part of profits in achieving the goal of common prosperity.

In pursuance of “Common property to date, Tech Stock, Education Sector, Real Estate have paid a heavy price, now it is the turn of the Energy sector. Who knows what new discourse, route and economic woe the ambitious plan of the Chinese government will bring?!