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China’s Energy Sectors Face Continued Pressure

China’s Energy Sectors Face Continued Pressure

Renee Mu, Currency Analyst

This daily digest will focus on new developments in China’s foreign exchange policy, changes in financial market regulations, and broader economic coverage in order to keep the DailyFX readers up-to-date on news typically covered only in Chinese-language sources.

- State-owned enterprises are seeing more signs of trouble, and reported losses of 13.5 billion for the first three quarters of this year.

- Chinese leading copper producers announced cut in output for 2016 as copper prices continue moving lower.

- Newly passed mandates Power plants are required to complete upgrades by as early as 2017.

Sina News

(China’s most important online media, similar to CNN in the United States, and also owns a Chinese version of Twitter, called Weibo, with around 200 million active monthly users).

- Tenmajor state-owned enterprises are seeing more signs of trouble and have reported losses of 13.5 billion yuan for the first three quarters of 2015. In the most recent quarter, we saw that some of these SOE’s may be forced to sell assets or request for subsidies to survive. More specifically, 67 out of 306 listed companies owned by the central government had a net deficit on their balance sheet during the first three quarters of 2015. Energy companies appear to be the most vulnerable.

The State-Owned Enterprises (SOE) in China are companies owned either by the central or local governments. In the 80s and 90s as Chinese growth really began to pick up, State-Owned Enterprises were very much at the center of the Chinese economy. However, due to efficiency problems, many of these firms went bankrupt during the late 90s after China adopted country-wide reforms in the SOEs to allow free market forces to play a bigger role. Now the SOEs are facing another test as China’s economy is slowing and global commodity prices are tumbling.

- Due to the continued drop in copper prices, ten leading Chinese copper producers announced an output cut of 350,000 metric tons for 2016. Last week, we saw copper prices drop again at the London Metal Exchange, to fall below $4,500 per ton for the first time in over six years.

As the world’s largest producer and the consumer of copper, China’s economic slowdown has brought significant pressure to copper prices. As a result, the copper producers in China are attempting to stabilize copper prices by A) reducing new production and B) calling on the government to absorb the excess inventory.

- At the State Council executive meeting on December 2, it was decided that by the 2020 all power stations must complete upgrades and meet the requirements in waste emissions and energy-saving. For the plants in eastern and central regions, they must meet the mandatory standard by 2017 and 2018 separately or else they would be forced to shut down. According to estimates, after all the upgrades are completed, the annual saving in coal will be about 100 million tons; with total pollutants discharged by power plants reduced by 60%.

The air quality issue in China has become a widespread problem and can seriously hamper continued economic development. For example, China’s PM 2.5 standard is <75 ug/m3 (a range that is healthy for human beings); WTO’s standard is <10 ug/m3.

However, on December 1 the figure for some districts of Beijing was as high as 900 ug/m3, far beyond the threshold of what is healthy and sustainable. This is yet another challenge for China to deal with, as they’re currently facing slower growth in the labor force and an aging population after the one-child policy has skewed demographic trends. At the same time, maintaining the quality of the labor forces and reducing heavy burden on health care are important as well, but China’s commitment to improving environmental issues could carry a long-term positive impact for the economy of China.

Written by Renee Mu, DailyFX Research Team

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.