The Chilling Thing China’s Electricity Consumption Just Said about the Economy

China has been building what is by now the largest high-speed rail system in the world. Subway systems are growing faster than anyone can imagine anywhere else. Ridership is soaring. High-rise buildings are sprouting up like mushrooms, to be occupied by businesses and consumers that are splurging on tech products, appliances, and air conditioning. All powered by electricity.

China built over 23 million cars, trucks, and buses last year, far more than any other country, in plants that are massive consumers of electricity. It’s producing building materials, solar panels, trains, ships, plastic trinkets, smartphones, and a million other things for its own use and for the rest of the world. All these activities require a lot of electrical power.

China is booming. GDP for the second quarter, despite rumors of a slowdown, came in at a once again astonishing annual rate of 7.0%, just as planned, once again confounding hard-landing gurus. Nothing is going to slow down China. It’s fueled by monetary propellants, endless credit that never turns bad and never has to be paid off, and a stock market run by fiat. So it would seem that electricity consumption would be soaring in parallel.

But no.

Electricity consumption in the first half of 2015 inched up to 2,662.4 billion kWh across the country. Compared to the same period last year, that was up a tiny 1.3%. The flimsiest growth rate in 30 years.

In 19 provinces, power consumption grew at above the national average of 1.3% compared to prior year, the People’s Daily Online reported, based on a brief by the China Electricity Council; but in 9 provinces, power consumption during the first half actually fell.

While electricity consumption in light industry rose by 2.1%, it dropped 0.5% in secondary industry and 0.9% in heavy industry.

So was the economy of China suddenly not growing at an annual rate of 7% during the first half?

The government has assured us: the GDP growth rate, stunning as it might appear, is unassailable. Instead we’re witnessing the transition from a manufacturing economy to a service economy, a transition that instead of transpiring over decades is happening suddenly, measurable in months and quarters, as if emboldened by the stock market bubble, its subsequent crash, and the current iron-fisted government rule over the markets and investors.

Perhaps Chinese manufacturers are switching to finance as an easier way of extracting money from “fresh leeks” (新韭菜), as inexperienced stock-market players (the teachers, farmers, and street vendors) are called, because they’re “abundant” and “destined for chopping” [read… Why I Don’t Short Stocks or Bonds in this Crazy Environment Where Nearly All Assets Are Overpriced].

But reality doesn’t cease to intrude, as exemplified by China’s giant industry of auto manufacturing, a battle ground hotly disputed by all global automakers, led by GM and VW Group, and dozens of Chinese manufactures that together produced over 23 million vehicles last year, and were expected to exceed that number this year by a good margin though that looks increasingly doubtful, given the 3.4% decline in passenger vehicle sales in June, after relentlessly dwindling growth in the prior months, despite heavy discounting by some manufacturers. VW Group sales plunged nearly 17%!

Automakers have been adding new plants and expanding the capacity of existing plants at a feverish pace, to supply a market that has grown in the double digits for years. They’ve powered it from being a backwater to being the largest market in the world over the course of a decade. And suddenly that wondrous market is turning on them.

Average capacity utilization for global brands has fallen to 94% in the first half, from the supply constrained conditions of yore that implied 100% utilization, according to Sanford C. Bernstein analysts cited by Bloomberg. The report explained that “2015 will be remembered as a turning point in industry capacity utilization.”

The auto industry isn’t the only industry to feel the pressures of sudden overcapacity after years of phenomenal growth. Other industries have been suffering from it for years. When overcapacity meets sluggish or declining demand, all kinds of economic activities begin to stumble. And along with them, the consumption of electrical power that makes it all work.

The implications are already showing up in the broader scenario beyond China. Read…   World Trade Drops Most Since Financial Crisis

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  26 comments for “The Chilling Thing China’s Electricity Consumption Just Said about the Economy

  1. Vespa P200E says:

    Interesting to see that commie cadres are reporting mere 1.3% increase in power usage but take that with grain of salt since the #s reported by PRC is manipulated to make the local and provincial cadres look good so reality might be that it is atually decreasing.

    China is flushed with over-capacity galore especially in capital intensive industries (steel, cars, aluminum, roads, ghost cities, ship building, petrochemicals, etc) thanks to the commies opening up the floodgate on bank lending to grease the economy from the 2008 downturn scare. It’d be interesting what % of the loans from the 2008-2015 are really non-performing.

  2. Despite China’s bulk, it is not a credit provider. It relies on credit imported (mostly) from Wall Street (also Frankfurt).

    The collateral for its RMB credit is dollars and euros, borrowed by way of sales from its customer bases in America and EU, customer bases that are (according to the fuel market) bankrupt. As a consequence, the collateral that China needs to keep expanding is … well, there is less of it.

    The result = China is over-leveraged. There is a run on hard currency.

    China sells Treasuries to raise dollars, this makes dollars scarce which pushes up ‘real’ interest rates (by way of foreign exchange) which further starves China of collateral in a vicious cycle.

    This cycle worked the other way when China was ‘booming’. The narrative of China growth by itself was worth $100+ billion/year in direct investments of one kind or another.

    15 years of reckless lending against external collateral and China’s banks are well-past insolvent. Every giant building, steel mill, auto factory, port, rail system is underwater. Leverage has been hopelessly mis-allocated. China = Greece.

    It is only a matter of time before the giant NYC banks turn on China and starve the country of funds. Why not? China would have to retire its own loans as its American customers can no longer do so … their jobs have been stolen by China!

    China will have to surrender something(s) of real worth, actual circulating dollars not NYC credit. If they cannot find the dollars — which are fleeing China in the hundreds of billion$ — they will have to turn over their Ming vases, their Great Walls, their “Little Red Books’ and their 7-foot tall basketball players. The rest is utter garbage they can keep … and choke on it.

    • DanR says:

      Is the reality this dire in China? It seems like they have issues but do they rise to the level of a high risk of implosion in the near future?

      • Hank says:

        I am an American living in China. There certainly isn’t a general slowdown. In my industry, some jobs are indeed moving “overseas” (to Vietnam), but its not noticeable on the street. I travel a lot on the trains. I don’t see any dislocation other than what has been going on for years. The high rises are still going up. The sky isn’t falling.

        • d says:

          I lived in Japan, in the height of its depression and deflation. on the high-tech street with ever new trains and buildings, you couldn’t see it there either.

          The first indicator if you looked hard. Was that only Wealthy Women, still regularly had new high quality shoes, as opposed to everybody, a few Years earlier.

    • Beowulf says:

      When they back the RMB with gold the US will choke on it.

      • Robert says:

        Choke on what? It would be quite a U-turn for the very nation that invented paper money to go back on the gold standard. The fact is a hard money standard takes real economic power from govt. and puts it back in the hands of the people, and at present, no nation is willing to do so- being able to print money at will is irresistible. And although national gold reserve figures are bandied about constantly, no one really knows who has what; furthermore, the attitudes of the central banks towards their own people varies according to the level of criminality- they are after all, generally privately owned, not public entities, though admittedly I do not how it works in nominally “communist*” China. (or how it is that billionaires are allowed to exist there.) For them to do so would be a refreshing change, and very simple: just make the so-called “security strip” out of gold instead of Mylar!

      • interesting says:

        “When they back the RMB with gold”

        and what would happen to the “value” of the RMB?

        if it explodes higher (which i think is your point) then their export based economic miracle collapses…….and how is that a positive for them?

      • A ‘hard’ currency (RMB) ‘backed’ with gold doesn’t mean anything.

        Since 1914 currencies have been ‘backed’ by so-called ‘productive enterprises’ and industrial output. However, a holder of currency cannot redeem his funds as ‘enterprise’ on demand … and that brings us to today.

        During the old-gold era, paper money was redeemable on demand for specie. If you had a twenty dollar US bill (or a banknote from a private bank) you could take it to a bank teller and receive a $20 gold eagle for your trouble. That’s what ‘gold backing’ means.

        Paying for your gold with a check is exchangeability. Everyone has that ability right now.

        If the gold is held nowhere in particular and a bureaucrat gets on TV and sez that ‘our currency is gold-backed’ without any redeemability it is simply another finance scam. There is either redeemability or there is nothing.

        If gold becomes redeemable, it would have to be at a discount to the market price. Why? Because people would hoard it otherwise and there would be no business! The only way commerce works is when holding currency is a losing proposition compared to spending the money on something else … like poison dog food. Hard currencies cease to circulate and become scarce, the outcome is (severe) recession and depression. The entire economy becomes nothing but swapping paper to gain gold … which is what took place in the USA and elsewhere during the early 1930’s … when most of the banks in the US failed … when a nice farm could be bought for 35¢ at a foreclosure auction.

        If China announces that a ‘hard’ RMB ‘backed’ with gold it will be another scam. Nobody would be able to redeem their funds for gold, only the usual Chinese-made garbage.

        Keep in mind, there would be no reason for China’s authorities to buy the gold just to ‘sell’ it at a sharp discount, which is what redeemability implies.

        Gold standards fail in the modern industrial era because industry is always underwater, it needs a constant debt subsidy which includes the constantly depreciating currencies.

        • d says:

          “Gold standards fail in the modern industrial era because industry is always underwater, it needs a constant debt subsidy which includes the constantly depreciating currencies.”

          And that is the problem.

          Industry, based on credit.

          Which must have “Consumerism” also based on credit, to fuel it.

          And it will fail just as badly as the “Tokugawa”, when they could no longer make the interest payments.

          The “Tokugawa” came do the traditional end. Destroyed by WAR, indirectly with “America”.

          The “First” “Japanese American” war of conquest, by America.

    • meofio says:

      but its Greece with its own printing press, so it can kick the can down the road for few more years

  3. Roddy6667 says:

    China has undertaken a serious attack on air pollution. The results are visible, literally, in Northeast China where I live. One of the big factors was shutting down dirty, inefficient electrical generating plants and building new ones. Also, many dirty, inefficient factories were shut down, especially in the Beijing area. The results are starting to show, but of course, the western press has to spin this as a negative. They want their uneducated, untravelled readers to think that China is collapsing, when it is getting better.

    • Wolf Richter says:

      You’re confusing how electricity is produced (cleaner, more efficient power plants replacing dirtier ones) with electricity consumption. Switching to cleaner, more efficient or renewable power plants is great, and China is doing it. But that doesn’t impact electricity consumption.

      Industry consumes electricity regardless of how it is being produced. So when you’re idling manufacturing facilities because there is not enough demand and too much inventory, than that’s not a great thing in terms of the economy. Of course, it might help with pollution.

    • Hank says:

      Thank you. Well said. I also live and work in China and I don’t see any major issues and I’m in a twilight business for China (textiles).

  4. NotSoSure says:

    Not sure how it squares with this:

    Has the number of Chinese traveling abroad declined, because I still see tons of Chinese tourists here in SF (an an example) staying at Hilton, etc.

    • Vespa P200E says:

      I was in Europe 4 times and Asia once on biz trip last year and there were Chinese tourist everywhere packed in the tour buses. My family joined me on 1 trip and I drove up to the “Disney” castle in Bavaria late in the day so wife and kids can get in before they close (I wasn’t supposed to) and all I saw were Chinese tourist going uphill or downhill… But not even 1 Chinese tourist in the town Fussen that evening as they must have been bused to Chinese buffet or something.

      I haven’t seen too many in the SF bay area in the Fisherman’s Wharf couple of times I was there on Sunday though.

  5. Lee says:

    Were those electricity figures broken down by area and type of consumption?

    Which areas had consumption fall? Were those areas where heavy industry or large population are concentrated?

    Was the weather unusually warm during the period in question?

    I don’t the figures out of China any more than the ones of the USA, but more analysis is required……………..

    • Wolf Richter says:

      As reported, the period covered 6 months, so weather is an unlikely factor. If it had been “unusually warm,” as you said, AC used would have increased electricity consumption during the later part of the period, while less heating might have decreased consumption during the earlier part of the period. On a monthly basis, this can make a big difference. On a half-year basis, weather is much less influential.

      Weather also has little impact on industrial consumption of electricity. And that’s where the hurt was.

      Provinces were not named. So I don’t know in which 9 provinces consumption actually fell. That would be nice to know, but its doesn’t impact the fact that electricity growth across this huge country with over 1.3 billion people is slowing to a crawl overall – and declining in some parts.

      • d says:

        Those accurate Electricity numbers used to be real easy to get, month on month, until they figured out what we were doing with them.

  6. lG says:

    did you ever get the same fortune cookie?

  7. Ian says:

    Typo? ‘fresh leeks’, newbies

  8. night-train says:

    Kuddos all. Excellent and fascinating discussion. This site never disappoints. And that is quite an accomplishment these days.

  9. Yadubi says:

    Here is a link to a lecture by Lester Thurow of MIT: Among others, he says: “There is one economic variable that is very closely connected with economies; the use of electricity. The twelve most rapidly growing countries in the world, to get a one percent growth in GDP, they need to use about two percent more electricity.”

  10. Martin says:

    As a foreigner have been working in S China for several years and operate middle enterprise, I can say that I am also surprise by this slightly increase in electricity consumption numbers compare with still high GDP numbers. Chinese at work are not people who care about how much energy we use and have to pay, read Company pays. So, there is a lot of waste, I have to often switch lamps, AC, off by myself to reduce our electricity bills. I cannot believe that they in scale of country applied energy saving processes and produce more goods using a little bit more energy.

    Another issue is a Chinese statistics. We are obliged to report monthly our production output, sales, etc. Our accountant is usually requested to revise the report on more rosy data what she received in feedback from local statistic office. That’s the reality. Nobody believes in these numbers, but we also do not know the truth.

  11. Julian the Apostate says:

    So. The truth is leeking out? Oops. Did I mispell that? Put out the hurricane warning flags – the China trade goods tsunami is on the way.

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