China Prepares To Export More Inflation Back To US As It Announces Hikes In Commercial Electricity Prices

Tyler Durden's picture

So much for the interesting theory presented a few days back from Bernstein that one contrarian response from China to its electricity shortage problem is not to hike prices but instead to slow down its economy by pushing the margin producers out and allow the economy to slow down on its own. As a reminder, last Friday Bernstein analysts Parket and Leung, in discussing the 30 gigawatt power shortage currently gripping China, was the following: "a nationwide power price increase to alleviate the problem is not likely. Letting the current stand-off run its course – in the worst case scenario, allowing electricity shortages and the high price of fuel substitutes to force factories to shut down - would slow the economy. And that's the key point in our view: increasing electricity prices is inflationary while holding prices steady would achieve the NDRC's current economic goals." Alas, China has opted for the convention path, and as Business China reports, "China will raise prices for electricity used for industrial, commercial and agricultural purposes to curb demand from energy-intensive industries and encourage power generators to increase electricity supplies." Sigh - add more inflation, more resultant PBoC tightening, and more of the same dog chasing its tail failed policies that will lead the world's fastest growing economy nowhere fast.

From Business China:

Prices for non-residential users in 15 provinces will be raised by an average RMB 16.7 per megawatt-hour, while prices for residential users will remain unchanged, according to an unnamed official at the National Development and Reform Commission, China’s top economic planning agency.

Prior to that, the country’s on-grid power tariffs were raised in 12 provinces by an average RMB 20 per megawatt-hour on April 10.

The recent hikes in on-grid and retail power prices aim to solve power outages from the perspectives of supply and demand; raising on-grid power prices can ease the enduring losses of thermal power plants, while the increase in retail prices will curb the excessive growth of energy-intensive industries, said Lin Boqiang, director of the China Energy Research Center of Xiamen University.

China may face the worst electricity shortage since 2004, and it is conservatively estimated that there will be an electricity shortfall of 30 million kilowatts this summer, according to Xue Jing, director of the statistics department of the China Electricity Council (CEC), the industry group for operators of power plants and utilities.

Here are the industries that are about to experience yet another margin shortfall in the mainland unless the succeed in raising prices... Many of which will impact none other than the US consumer.

CEC data show China’s industrial power consumption in the first four months amounted to 1071.6 billion kilowatt-hours, up 12% from a year earlier. In April, daily average power usage of the manufacturing sector reached 7.3 billion kilowatt-hours, breaching the monthly record of 7 billion kilowatt-hours for the first time.

Chemical, construction material, steel and non-ferrous metal refining consumed a combined 481.3 billion kilowatt-hours, up 11.6% year-on-year, according to the data, reflecting the rebound in the consumption of energy-intensive industries.

In many regions in Zhejiang, one of China’s most industrialized provinces, power supplies are being strictly controlled and many factories are taking a 1 day break after every 3 days of operation to reduce demand for electricity.

“Releasing the production capacity of high energy-consuming enterprises has intensified the power shortage,” said Yang Janhua, a professor at the Zhejiang Academy of Social Sciences.

In the first quarter, Zhejiang’s fixed asset investment advanced 29% on a yearly basis, with the added-value of heavy industry up 13.7% and electricity usage in the chemical and non-ferrous industries up 20%.

For those that may be unfamiliar the primary cause for the latest spike in inflation in everything from food to goods and services is the worst drought to hit the country in half a century, discussed previously here.

China is suffering from the worst drought in more than 50 years as hydropower plants are unable to operate at full capacity.

In Jiangsu, Zhejiang, Hunan and Guangdong provinces, average utilization hours of hydropower equipment fell to historical lows either in the first four months or in April alone, according to Shao Minghui, an analyst at China Post Securities.

“In Zhejiang and Hunan, the actual utilization hours of hydropower equipment slumped 73.87% and 55.34%, respectively, compared with a year earlier, which fully proves insufficient hydropower supply is one of the vital cause of the present power shortage,” Shao said.

In China, thermal power makes up 77% of total electricity output, and hydropower accounts for around 20%.

“In newly installed equipment, the proportion of thermal power continued to fall, leading the growth of effective power supply capacity in summer 3 to 4 percentage points lower than the growth of maximum loading,” a CEC report said.

“If coal prices remain high and the drought continues in central and eastern China, the limited supply of electricity will get worse,” Xue said.

And by that they mean that contrary to Bernanke's hopes for a prompt "15 minute" inflation resolution, the re-exporting of inflation is about to begin in earnest, likely peaking some time in July, just as the US economy is really hitting the skids.

As we said back in January, unlike 2010, when the keyword was "stagflation", the word of choice to describe 2011 will be stagflation. We are sticking with this prediction.