China

China’s Mysterious Electricity Slowdown

Tao Wang, an economist at UBS, sent out a note today about the China’s collapsing growth of electricity consumption. Since electricity consumption is often taken as a proxy for GDP growth, some wonder whether this is an early indicator that China’s economic growth is collapsing?

Tao Wang’s answer:

- The growth of China’s electricity consumption slowed sharply in the last couple of months (Chart 1). Why did this happen? Does it mean that the underlying industrial activities are slowing rapidly as well, and that the relatively good industrial production and investment numbers are wrong? I have been asked this set of questions so many times that I decided to devote our first issue of China’s “question of the week” to them.

- As a start, we do not think electricity consumption is necessarily a more accurate indicator for gauging the true pace of industrial activity in the economy. The apparent divergence between the growth of power consumption and the growth of industrial production may be partly related to the surging coal prices and coal shortage, and partly due to the closing of some energy-intensive production capacities.

- It is tempting and reasonable to assume a certain fixed relationship between the growth of power consumption and industrial production (or GDP). However, this could miss the specific circumstances (such as the Olympics-related shut downs, and energy saving measures in light of possible power shortages) in the short run and structural changes over the long term.

- We found a much simpler explanation: Electricity consumption slowed by more than industrial production because production in the power-intensive industries slowed sharply (Chart 2). The commonly known heavy power users - iron and steel, cement, and copper producers - saw production slowing sharply in the last couple of months.

- These sectors are known to be energy intensive - they account for a larger share of power consumption relative to their contribution to industrial value added. That is why we did not see an equally steep deceleration in the growth of industrial value added.

- While this may not explain the whole story of the divergence, but it is much more plausible and consistent with our view that while China’s economy is slowing, it is not collapsing like the electricity consumption data might suggest.

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