China’s growth forecasts slashed as heatwave hits industrial heartlands

By Laura He, CNN Business

China’s economic growth forecasts have been downgraded further by major investment banks, as the country grapples with its worst heatwave in 60 years.

The extreme weather comes at a time when the world’s second largest economy is already slowing because of strict Covid-19 lockdowns and a real estate crisis. The heatwave has added further strain to the economy, with some provinces shutting factories to save power.

Goldman Sachs cut its forecast for China’s GDP growth this year to 3% from 3.3%, after taking into account weaker-than-expected economic data for July and the energy constraints resulting from the heatwave. This marks the third cut by the Wall Street bank since May.

“An unusually hot and dry summer has been stressing power supply and leading to production cuts in certain provinces and some energy-intensive sectors,” Goldman analysts said in a report published late Wednesday.

“Although we do not expect a repeat of the power outages and significant production halts seen last year as coal supply remains ample, energy constraints are likely to slow the pace of recovery in August relative to our previous expectations,” they said.

In the second half of last year, an energy crisis caused widespread power outages in China. The blackouts were blamed on shortages of coal, which China uses to produce about 60% of its electricity, and a surge in power demand.

The Goldman analysts also said that the July batch of macro data, released earlier this week, showed “an unequivocal picture of weak domestic demand.”

The recent Covid resurgence is also a roadblock to China’s near-term recovery, they added.

On Thursday, Nomura also lowered its forecast for China’s growth this year to 2.8% from 3.3%, because of the loss of momentum in July, a Covid resurgence, and the heat wave.

The extreme weather “has caused a quick surge in residential usage of electricity for air conditioning, and led several provinces to either limit electricity usage or conduct power rationing, across some of China’s most important industrial heartlands,” they said.

The resulting drought may further affect power supply and food harvest, they added.

China is facing its worst heat wave since 1961, with temperatures crossing 40 degrees Celsius (104 degrees Fahrenheit) in more than 100 cities. The weather has caused the country’s crucial Yangtze River to shrink and led to drought in more than 70 cities.

The extreme heat and drought have caused a spike in demand for air conditioning and a slump in hydropower supplies, placing strain on the electricity grid.

China’s Sichuan province, where factories have shuttered production this week, is a hub for makers of semiconductors and solar panels. The power rationing will hit factories belonging to some of the world’s biggest electronics companies, including Apple supplier Foxconn and Intel.

The province is also the epicenter of China’s lithium mining industry, and the shutdown may push up the cost of the raw material, which is a key component in electric car batteries.

The neighboring city of Chongqing, which sits at the confluence of the Yangtze and Jialing rivers, has also ordered factories to suspend operations for a week through next Wednesday to conserve electricity, state media The Paper reported.

The heatwave comes at a time when Covid cases in the country have been rising, leading to lockdowns in some major cities, including major tourist destination Hainan, often called “China’s Haiwaii.“

“China’s growth in the second half is likely to be significantly hampered by zero-Covid strategy, the deteriorating property sector, local governments’ worsening fiscal conditions, and a likely slowdown in export growth,” Nomura analysts said.

At a key political meeting last month, the country’s top leaders were unusually silent on the growth target the government had set for the year — about 5.5%. Analysts have said that this is a sign that the government thinks it might not be able to meet its goals after all.

“In contrast with some people’s concerns about too much policy stimulus in the second half, the real risk is that Beijing’s policy support may be too little, too late and too inefficient,” the Nomura analysts said.

CNN’s Shawn Deng in Toronto and Wayne Chang and Simone McCarthy in Hong Kong contributed to this report.

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