China's power crunch dwarfs Evergrande's troubles in investors' eyes

Angang Steel Co

28/09/2021 14:27

By Samuel Shen and Alun John
    SHANGHAI, Sept 28 (Reuters) - China's power supply crunch,
that has shut factories across the country, may pose a much
bigger threat to the economy than the debt crisis at Evergrande
Group  3333.HK , prompting investors to shun industries
vulnerable to power shortages such as steelmaking and
construction.
    China is facing a power squeeze from a shortage of coal
supplies, tougher emissions standards and strong demand from
manufacturers and industry that have triggered widespread curbs
on usage. Factories have stopped operations due to power
shortages and government mandates to meet energy and carbon
reduction goals.  urn:newsml:reuters.com:*:nL4N2QQ2AN
    Goldman Sachs and Nomura have revised down projections for
Chinese economic growth this year as a result. Shares in Chinese
chemical producers, carmakers and shipping companies have
tumbled, while renewable energy stocks have soared.
    Investors believe the potential scale of the problems could
dwarf the any fallout from liquidity troubles at property
developer Evergrande, with liabilities of $305 billion, that
roiled property stocks and bonds this month. 
    "The Evergrande crisis has been unfolding for quite some
time, and I think the risks will be defused in a targeted way,"
said Yuan Yuwei, hedge fund manager at Water Wisdom Asset
Management.
    He said the electricity outages would break the
supply-demand equilibrium, dealing a direct blow to consumption
and the real economy. "The fallout is more likely to be out of
control," Yuan said.
    Yuan's current investment stance is to bet on hydropower
companies such as SDIC Power Holdings  600886.SS  and Sichuan
Chuantou Energy Co  600674.SS , while shorting steelmakers and
coal-fired power makers.
    
    OVER-REACTION
    In contrast, some property shares, hit hard by the
Evergrande crisis, have started to bounce back, as some
investors bet the market has over-reacted. 
    "We have been underweight in developers, but have been
gradually been buying into this weakness," said Rob Mumford,
Hong Kong-based investment manager at GAM Investments.
    "There are clearly distressed valuations for companies that
are not in distress currently." 
    An index of Hong Kong-listed mainland China property stocks
 .HSMPI , added 6.4% on Tuesday, after hitting its lowest level
in over four years last week, while an index of Shanghai listed
real estate stocks  .CSI000006  also gained 3% on Tuesday.
    The rally came after China's central bank vowed to protect
consumers exposed to the housing market, without mentioning
Evergrande in a statement posted to its website on Monday, and
injected more cash into the banking system.  urn:newsml:reuters.com:*:nL1N2QT0OI
    
    NO POWER REBOUND
    However, so far at least, few investors have been tempted to
go bargain-hunting among companies hit by the power shortage,
fearing the situation could deteriorate further 
    An index tracking non-ferrous metal makers, such as copper
and aluminium companies  .CSI000811 , is down 15% this month.
Shares in China's biggest steelmakers have plunged - for
example, Baoshan Iron & Steel Co  600019.SS  and Angang Steel
 000898.SZ  are both down over 20% since their mid September
recent highs. 
    The problems are widespread. 
    Twenty provinces have implemented power cuts since
mid-August, including the manufacturing hubs of Guangdong,
Zhejiang and Jiangsu, putting pressure on companies' earnings. 
    Production of steel, aluminium and cement, as well as
infrastructure construction, would be immediately affected by
the power cuts and supply restrictions, Morgan Stanley analysts
wrote in a report published on Monday, adding the impact could
ripple downstream to hit more sectors such as shipping and
automobiles. 
    Yang Tingwu, vice general manager of hedge fund house
Tongheng Investment said he now prefers companies with few
factories, as China's curbs on energy and carbon emissions "is
bad news for the overall economy in the near term."
    

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EXPLAINER-What is behind China's power crunch?     urn:newsml:reuters.com:*:nL4N2QQ2AN
China energy crunch triggers shutdowns, pleas for more coal   
 urn:newsml:reuters.com:*:nL1N2QU08X
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 (Reporting by Samuel Shen and Alun John; Editing by Sumeet
Chatterjee and Jane Merriman)
 ((samuel.shen@thomsonreuters.com;  +86 21 20830018; Reuters
Messaging: samuel.shen.thomsonreuters.com@reuters.net))