Macroscope | Amid power cuts and property curbs, can Chinese stocks bounce back?

Name: Life with no power: Why some major cities in China are having to ration electricity
Uploaded: 2021-10-08T06:30:12.000Z
Duration: 3 min 30 s
Description: Life with no power: Why some major cities in China are having to ration electricity

Power constraints are expected to ease and property deleveraging risks remain low but investor sentiment is unlikely to change unless Beijing significantly eases its fiscal and monetary policies

Reading Time:3 minutes

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Pedestrians walk past a public screen displaying the Shenzhen Stock Exchange and the Hang Seng Index figures in Shanghai, on August 18. It has been a rocky third quarter for Chinese equities. Photo: Bloomberg

Sylvia Sheng

Published: 2:30pm, 8 Oct 2021

The third quarter lived up to its reputation as a more challenging time of the year for Chinese equities, with the CSI 300 Index down 6.8 per cent. Historically, the fourth quarter, in contrast, has mostly been a positive time for Chinese equities.

In the past 10 years, the CSI 300 has averaged gains of 7.4 per cent in the fourth quarter and was up in seven of the past 10 years. Will this period bring a better performance for China’s equity market after a rocky third quarter?

Concern about China’s slowing economic growth momentum is one of the main factors weighing on investor sentiment. This seems unlikely to change in the near term amid growth headwinds from power cuts and tight property policies.

Following sharper-than-expected slowdowns in July and August due to flood shocks and a resurgence in Covid-19 cases, the latest manufacturing purchasing managers’ index (PMI) points to further weakness. September’s official PMI fell below 50 and entered contractionary territory for the first time since February 2020, probably reflecting weaker production as a result of power constraints.

Power cuts in China were imposed in over 20 provinces last month due to electricity supply issues and tighter emissions controls. Thermal coal power generation, which accounts for more than half of China’s overall electricity production, has been constrained by surging coal prices amid tight supply.

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Life with no power: Why some major cities in China are having to ration electricity

Domestic coal production has been weighed down by strict mining capacity controls since 2016 as well as disruptions to imports from Australia and Mongolia. Hydropower production, which was down 1 per cent year on year in the first eight months, added to the power supply problem.