Extreme heat and lack of rainfall are severely affecting Sichuan province. Power outages and the suspension of factory activity are pushing the local economy to the brink of a deep crisis. 

Sichuan is one of the most populous provinces in China; with a young and growing industrial activity, it consumes a high amount of electricity, 80% of which is obtained from hydroelectric power plants, including the dam located in the city of Ertan. 

The flow of Sichuan’s rivers increases considerably during the summer due to abundant rainfall. This generates surplus hydroelectric power produced by the dams, which is sent to other provinces, including more distant cities such as Shanghai.

However, the shortage of rainfall, increasing drought, and extreme heat waves plaguing the province are affecting Sichuan’s energy production and the rest of the region.

Extreme weather is causing drought in some tributaries of China’s largest river, the Yangtze River, where the Three Gorges, the world’s largest dam, is located.

“Rural and mountainous areas are suffering the most from water shortages. There has been no rain this month. The rivers have dried up, and there is a high risk of fire,” said a resident named Huang from the town of Dazhou, a city 70 kilometers or (43.5 miles) from the Sichuan capital.

Factory closures and red alert

The lack of rainfall, the decrease in water flow, and the drop in energy production have forced the closure of factories in Sichuan. Some factories had to stop production until August 21. However, the local government extended the forced closure until Thursday, August 25.

Due to low labor costs, several automotive and electronics manufacturing centers relocated to Sichuan over the past few years. The suspension of these factories may impact the entire production chain. For this reason, Shanghai sent a formal request to Sichuan to secure energy supply for the auto parts factories. 

Toyota has an automotive plant in Chengdu, the capital of Sichuan, and announced on August 16 the suspension of the plant due to power cuts. The company manufactures 30,000 vehicles each year there.

Foreign companies such as Honda, Isuzu Motors, Ford Motor, Foxconn, Intel, Apple, and other major Taiwanese electronics factories have their plants in Chengdu.

According to state media reports, electricity consumption in the region rose by 25%, while the flow of water supplying the dams decreased by more than half. Other provinces in China are on “red alert” due to the high temperatures recorded, such as Inner Mongolia, Anhui, Jiangsu, Zhejiang, and Shanghai.

In urban centers, the situation is critical, with power outages affecting businesses and residential areas. A message from State Grid in Dazhou, a manufacturing center in the north of the province, said, “Power use for industrial production has not resumed, as the priority is focused on ensuring power for use in residential areas [is sufficient], although it is also being rationed.”

“Resumption of normal supply depends on weather conditions. Rains are expected on August 25.” Authorities reported that extreme temperatures of more than 40 degrees Celsius are likely to persist until the end of the month and that necessary measures are being taken, including developing contingency plans to ensure power supply to households. In this regard, Shanghai gave the order to keep off all decorative street lighting. 

Interest rate cuts to stimulate economy 

On August 22, China’s central bank announced that it would cut five-year interest rates by 0.15% to 4.3%. In addition, the annual rate on loans will also be lowered by 0.05%. 

“Banks in China cut the one-year prime lending rate by five basis points, but reduced the five-year rate by 15 basis points. This indicates that banks are supporting mortgage borrowers,” said Iris Pang, chief mainland China economist for ING Bank.

China’s economy is in crisis due to multiple factors, such as natural disasters, zero COVID policy, energy shortages, Evergrande’s impact on the property market, and more supply chain difficulties. 

In this regard, a trend of boycotting mortgage payments on properties under construction is emerging strongly in several Chinese provinces. The interest rate cut measures will not immediately impact mortgage debtors, but their effects will be seen in early 2023.

“The cuts will reduce interest payments on existing loans, easing pressure on indebted companies. It will also bring down the price of new loans. The much larger cut in the five-year rate suggests that the PBOC [China’s central bank] is particularly concerned about housing market problems,” said Sheana Yue, China economist for Capital Economics.

“However, homebuyers with existing mortgages will have to wait until the beginning of next year for the change to affect them. Moreover, the current weakness in loan demand is partly structural, reflecting the loss of confidence in the housing market and the uncertainty caused by recurrent disruptions caused by the ‘zero covid’ policy. These are burdens that cannot be easily resolved by monetary policy.”

At one of the latest party meetings, the CCP leadership insisted on striking a balance between growth, reinforcing the ‘zero covid’ policy, and ensuring economic development. The annual growth target “around 5.5%” is far from being achieved in 2022 after recording only 2.5% growth in the first half of this year.

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