China is mining much more coal again and that’s boosting its factories

By Laura He, CNN Business

China’s economy is finally getting some good news: Its big factories are staging a recovery as a power crunch that held back production starts to ease because of a big jump in coal supply.

A government survey of manufacturing activity increased to 50.1 in November from 49.2 in October, according to data released by the National Bureau of Statistics (NBS) on Tuesday. It was the first reading above 50 — indicating expansion rather than contraction — in three months. It was also the first time since March that the index increased over the prior month.

Beijing on Tuesday attributed the improvement to “recent policy measures” that have strengthened energy supply and stabilized soaring costs.

“In November, power shortages eased and prices of some raw materials dropped significantly,” said Zhao Qinghe, senior statistician for NBS, in a statement.

But while the official numbers are promising, data from a private survey this week does not paint a robust picture. The Caixin PMI survey said Wednesday that China’s manufacturing industry for November slipped into contraction territory, falling to 49.9 from October’s 50.6. A reading below 50 indicates contraction rather than expansion.

The discrepancy between the two surveys can be attributed to methodology — Caixin looked at small and private companies, whereas the government focused on larger ones.

Wang Zhe, senior economist at Caixin Insight Group, highlighted the problems facing smaller businesses in China, including deteriorating employment and high raw material costs. He added in a statement accompanying the data that policymakers “should still focus on supporting small and midsize enterprises.”

Even so, the surveys taken together “still suggest that industrial output rebounded in November as power shortages abated,” according to a report from Sheana Yue, assistant economist for Capital Economics.

China has grappled with the power crunch for months, as extreme weather, surging demand for energy and strict limits on coal usage delivered a triple blow to the nation’s electricity grid.

The problem came to a head in September, when companies were told to limit their energy consumption in order to reduce demand for power. Supply was cut to some homes, reportedly even trapping people in elevators.

The energy crunch, along with surging raw material costs, resulted in a sharp drop in industrial output for September and October. To combat the problem, authorities have relaxed their efforts to cut carbon emissions and ordered coal mines to ramp up production.

The result was notable. China — which uses more than half the world’s coal supply and is already the largest emitter of carbon — set a new daily record for coal production in mid-November, according to statistics from the National Development and Reform Commission (NDRC).

The agency’s “strong interventions” mitigated the “overall power shortage” and eased cost pressures on some industries, analysts from Citi wrote in a Tuesday research report. The power woes had pushed up the cost of aluminum, steel and other raw materials, rippling through industries like carmaking and construction.

Stress still to come?

But there may be some continued stress on industrial output in the coming months, resulting from China’s preparation for the upcoming Winter Olympics, a continuing crisis in real estate, and the potential impact of the new Omicron variant of the coronavirus.

The Citi analysts said that the production of raw materials — which causes high levels of air pollution — may be limited in northern China as the government tries to “ensure blue skies for [the] Beijing Winter Olympics.”

The downturn in China’s property sector poses another risk.

Tuesday’s data showed while new orders received by factories rebounded somewhat, that gauge still did not enter expansion territory, suggesting that domestic demand remains weak.

“The major challenge now is the significant pressure that the property downturn puts on the aggregate demand,” the Citi analysts said. Real estate — and related industries — account for as much as 30% of Chinese GDP.

Tuesday’s data also showed that non-manufacturing PMI, which measures the performance of services and construction industries, reached 52.3 in November, slightly weaker than October’s 52.4.

Analysts say the Omicron variant might be a concern going forward, especially for the services industry.

The newest variant of the coronavirus has been labeled of “concern” by the World Health Organization because of its seemingly fast spread in South Africa and its many troubling mutations. While specific details of the new variant have yet to be made clear, several countries have scrambled to impose travel bans.

China, though, has long pursued a “zero Covid” approach, and maintains what are already among the strictest border restrictions in the world.

“Looking ahead, most of the weakness in services should reverse in December unless — obviously a big caveat with the emergence of Omicron — there are new outbreaks,” wrote economists with Capital Economics in a Tuesday research report. “In that case, the authorities would turn to more stringent controls to contain it.”

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