SHANGHAI: 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, 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.
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 US$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 and Sichuan Chuantou Energy Co, while shorting steelmakers and coal-fired power makers.