Weather Chills China's Economy

(page 2 of 2)

The difficulty for Beijing's policymakers is that they want the overheated economy to cool off some, but not so much that job growth sputters at a time when demand from China's biggest export market is likely to fall as the U.S. teeters on the brink of recession (BusinessWeek.com, 1/24/07). "People are already expecting an export slowdown," says Sun. "If they see two months of slow export growth, that could cause some problems in confidence."

Confidence is taking a hit now in many sectors of the economy. Over the weekend, ice storms forced authorities to restrict electricity to factories and plants in the center of the country. One company affected was Sydney (Australia)-based mining company Sino Gold, through its operations in Guizhou province. Sino Gold's plant normally needs 13 megawatts of power to extract gold from the gold ore, but recently has only been able to get eight. The company originally expected to produce 12,700 ounces of gold for February, but with the plant running at less than full capacity it will have to dial back its forecast. "We were previously told we were likely to be on full power by the 28th," says Jake Klein, Sino Gold's chief executive. But that deadline has passed and he's not optimistic. "With the extreme weather, we're told that the restrictions will continue," he says.

Drought Raises Demand for Coal Power

For now, multinationals operating in China are trying to remain upbeat, saying that business hasn't been affected. Dell (DELL), for instance, employs 3,000 workers in the southeastern city of Xiamen, where the computer company builds PCs for the Chinese market. Xiamen has been spared the worst of the weather, says Dell spokesperson Sharon Zhang, and most of Dell's suppliers are based nearby. "For manufacturing there is definitely no impact," she says. Still, Dell commits to a four-hour response time if customers need on-site technical support, something the company will obviously be hard pressed to do right now. The Chinese New Year is a peak shopping season in China, and the transportation bottlenecks might hurt the ability of stores to stock up on inventory in the days before the holiday. However, Zhang says, that shouldn't be a big problem for Dell. "The majority of the goods should be at the stores already," she says.

Chinese meteorologists blame global climate change for the unseasonably high snowfall. However many of the resulting problems have been exacerbated by recent government decisions. Of the 17 (out of a total of 31) provinces to report power shortages, most are concentrated in central China. It's no coincidence that since last winter, that part of the country has been experiencing the most severe drought in 50 years. "These areas use hydropower more than other areas, so the drought in these areas affects how much electricity they can generate," Zhu Hongren, deputy director of the macroeconomic planning agency National Development & Reform Commission's economic cooperation bureau, told reporters at a Jan. 28 press conference.

Since Jan. 12, the western city of Chongqing has been restricting electricity to factories and asking some of them to start their vacation early. The abnormal amount of snow has caused power lines and supporting pylons to snap like twigs. Plus, without hydropower, Chongqing is relying entirely on coal-fired power plants, forcing them to overwork and break down. Because Chongqing does not have its own coal mines it needs to buy coal from other parts of China and transport it to western China, and that too has posed a problem. "Since December, we haven't been able to get enough coal," says He Ruisheng, director of Chongqing Electric Power's press office.

China's coal supplies have dropped to 21.4 million tons as of Jan. 25, half of its normal levels. Chinese power plants' ravenous demand partially explains the steep drop in coal supplies, but there are also other factors. In a research note to clients, Goldman Sachs (GS) economist Hong Liang points out that the government caps electricity and gasoline prices, but allows market prices of coal and oil to continue to rise. Hence it's not surprising that power companies are reducing electricity supply as their profit margins get squeezed. Also, authorities have been cracking down on unsafe mines and closing small mines.

Einhorn is Asia regional editor in BusinessWeek's Hong Kong bureau . Tschang is a correspondent in BusinessWeek's Beijing bureau.