China's economy has been on steroids for the past 2 years. Faced with the loss of export sales after the financial crisis began in 2008, the government doubled bank lending overnight (red column above). It also introduced a $580bn stimulus programme (13% of GDP).
This included subsidised sales of electrical appliances, and was great news for the chemical industry. But appliances need power to operate, as do the factories that make them. And building new power stations, plus the necessary transmission systems, can't be done overnight.
Electricity consumption (blue line) has since soared. In H2 2010 it was 26% above H2 2008, and China became the world's largest consumer. But this year, supplies have been running short. April's consumption was up just 11%, after a 2% fall in March, and the government fears shortages this summer may be worse than in 2004.
Equally, the combined impact of the lending and stimulus programmes has been to let the inflation tiger out of the cage. Food inflation has reached 11.5%, for example. This has caused the government to try and put the tiger back in the cage, by clamping down on price rises.
• 73% is coal-based, where prices are up 20% this year
• But power companies have only been allowed a 2.5% increase
• So they are now cutting supplies, to avoid bankruptcy.
6 provinces are already rationing electricity supplies, with another 5 preparing to do so. The Times also notes that
"Blackouts are starting to slow the nation's torrid growth of energy-intensive industries like steel, cement and chemicals. Unlike garment makers and other small manufacturers, the big factories cannot easily switch to backyard diesel generators....Equally, to support smaller businesses with diesel generators, China has banned exports of diesel fuel to conserve scarce supplies."
So now, the 'virtuous circle' of subsidies and increasing demand is turning vicious. Supply cannot keep up with demand. Equally, this is pushing up China's export prices for the first time in years. They were up 2.8% over the past 12 months.
And, of course, the great lending boom has caused its own problems. China's central bank has just held a closed door meeting with the largest banks, due to its concerns over "government backed loans and the property market":
• Property loans will now have a risk rating of 150%.
• Local government loans will have a risk rating up to 300%
• Even infrastructure will be at 110%
China's growth has been the mainstay of chemical industry demand over the past 2 years. Now we have to wait to see what happens next. And as the blog warned in December, there is an increasing risk that we will find we are in the middle of another 'China boom and bust scenario'.
UPDATE. Today, Tuesday, China announced electricity prices will rise 3%, in an effort to reduce power shortages over the summer. This will increase inflation by 0.5%, but the government had little choice.