By Michael Lelyveld
As the effects of China’s coronavirus cloud prospects for the economy, signs from the state power sector have added to concerns about diminishing growth.
Even before the scope of the virus infections became known in January, reports on China’s electricity use and predictions of consumption pointed toward a prolonged slower-growth trend.
The actual track of the economy has been hard to follow due to the rapid flurry of factors on both the positive and negative sides in the past month.
As 2019 drew to a close, several economic reports saw signs of an upswing in the fourth quarter, based on expectations of a break in the trade war with Washington.
After U.S. and Chinese negotiators sealed a Phase One agreement to halt further escalation of tariffs on Jan. 15, the International Monetary Fund raised its forecast of China’s growth in 2020 by 0.2 percentage points to 6 percent.
On Jan. 17, the National Bureau of Statistics (NBS) released its estimate of China’s gross domestic product in 2019, showing a 6.1-percent growth rate for the year with 6 percent in the fourth quarter, staying barely within the government’s target range of 6.0-6.5 percent.
State media reports stressed the positive aspects of the results, hailing “the country’s high-quality development” and the service sector’s 53.9-percent contribution to GDP, up from 53.3 percent in 2018.
There was less attention paid to the sharp drop in the official GDP growth rate from 6.6 percent in 2018 to 6.1 percent, the slowest pace in 29 years, according to Reuters.
But even the Reuters account noted a positive shift in the fourth quarter after the government responded with eased credit, generous tax cuts and infrastructure projects.
The official data “showed the world’s second-largest economy ended the rough year on a somewhat firmer note as a trade truce revived business confidence and earlier growth boosting measures finally appeared to be taking hold,” Reuters said.
But that was before the number of officially reported virus cases tripled over the following weekend, triggering a massive quarantine response in the central city of Wuhan and surrounding areas, posing major threats to public health, commerce and 2020 GDP.
As the contagion spread, Chinese officials voiced hope that the economic effect would not be as bad as that of the SARS outbreak, which was estimated by the Asian Development Bank to lower GDP by 0.5 percentage points in the boom year of 2003 when growth hit 10 percent.
Very different now
The recovery from SARS came quickly, but economic conditions look very different now.
China’s growth has been on a downward trajectory for the past decade, driven largely by the declining performance of traditional heavy industry and the government’s stubborn support for inefficient state-owned enterprises (SOEs).
Since 2010, annual economic growth rates have dropped steadily from 10.6 percent to the six-percent range, according to the World Bank.
A New York Times report on the potential impact of the virus concluded that it is “not yet clear.”
“Today, China’s economy is bigger but is growing at its slowest pace in nearly three decades. It is grappling with problems like the trade war with the United States and a campaign to wean local governments off their addiction to borrowing,” it said.
While the health scare is likely to reduce forecasts further, economists have been reluctant to quantify the potential economic damage as the extent of the contagion unfolds.
“Adding to the tragic human toll, the health crisis is certain to take a toll on China’s slowing economy, accompanied by losses already recorded in Chinese stock markets,” wrote Tianlei Huang, a research analyst at the Peterson Institute for International Economics in Washington.
China may no longer have the resources that it relied on for recovery from the SARS crisis 17 years ago.
“Today, China is running large fiscal deficits and thus has less room to apply fiscal stimulus as it did last time,” Huang said.
Even before the virus became a factor to consider in economic forecasts, there were signs from within the state sector that the growth slowdown was expected to continue for years.
The slower growth track may be an indicator of the economy’s weaker resilience and capacity to recover than during the outbreak of 2003.
According to a Financial Times report in January, an internal forecast by the State Grid Corp., which runs China’s electricity network, warned late last year that GDP growth could fall as low as 4 percent by 2024.
The company planned to cut capital spending accordingly, the paper said.
The monopoly “is now more cautious after being caught off guard by slower-than-expected economic growth and government ordered cuts in electricity prices in recent years,” it said.
There are several reasons for the glum pre-virus forecast from the giant state-owned monopoly, which was previously known for bullishness on the economy and investment in the electricity system.
For starters, China’s economic planners treated the State Grid’s ample finances as a target of opportunity two years ago when they sought to cut power costs for business and commercial users in an attempt to boost profits and spur the economy.
The attacks on the State Grid’s deep pockets highlighted the government’s schemes for granting subsidies to industries without paying for them.
In 2018, the State Grid slashed rates for commercial and industrial customers by 10.6 percent at the government’s behest, saving them 91.5 billion yuan (U.S. $13.2 billion), the official Xinhua news agency reported. The China Electricity Council estimated the break was worth 125.8 billion yuan (U.S. $18.1 billion).
In 2019, businesses were given a similarly sized rate cut. Although the burden fell mostly on coal-fired power plants, the State Grid was still smarting from the government’s pressure on its finances.
“Last year, at least 10 of the company’s 27 regional operations reported a loss — a record number according to company insiders,” the Financial Times said.
At the same time, power production and consumption have shown signs of weakening demand. The electricity figures have long been regarded as a surrogate indicator of economic strength.
In 2019, the growth of electricity generation fell by nearly half from 6.8 percent a year earlier to 3.5 percent.
Growth of power consumption dropped to 4.5 percent last year from a six-year high of 8.5 percent in 2018, official agencies and the China Electricity Council (CEC) said.
Playing up the rates
State media reports have tried to play up the stronger power consumption rates in the more vibrant service sector, which rose 9.5 percent, according to the CEC.
But a check of year-earlier reports found that service sector growth rate has also declined from 12.7 percent in 2018.
Power consumption growth in the industrial sector fell sharply from 7.2 percent in 2018 to 3.1 percent last year.
The poor results, combined with lower economic forecasts and overspending in the past, could drive the State Grid to cut capital spending by nearly a quarter this year, the Financial Times reported.
“With slowing growth, lower tariffs and consequent financial losses, the decision to cut back on investments seems very sensible,” said Philip Andrews-Speed, senior principal fellow at the National University of Singapore’s Energy Studies Institute.
The case of the State Grid may only be a barometer of declines in the state sector to come.
The impact from the coronavirus is only likely to cloud economic forecasts further, driving a cycle of lower demand and reduced investment that could last for months or years.