Massive Power Outages Looms on China’s Price Controls

China’s government is predicting a massive power outage which according to Forbes’ columnist Gordon Chang

a shortfall larger than the total installed capacity of Argentina—will be the worst ever, even more serious than the one in 2004.

In an earlier post, I mentioned that policies of price controls will definitely lead to unintended consequences, one of which will be shortages. Here is my comment on China’s reactionary policy to fix prices to combat inflation last April

This serves as a politically convenient short-term approach but nonetheless a foolish one because it defies basic economics that comes nasty repercussions (rationing, long lines, more political instability).

The Romans tried it, US President Nixon tried it and many political authorities spanning 4 centuries tried it but all of them failed. Venezuela’s Hugo Chavez has also recently implemented this but has even worsened inflation and shortages.

And these have been so predictable.

First politicians create inflation by debasing the currency.

Next, politicians blame the market for self inflicted ills, thereby, superficially react to such imbalances by imposing price controls which eventually backfires.

Forbes’ Gordon Chang narrates on how China’s price controls have been affecting her energy economics (bold emphasis mine)

The more important factor is that the cost of this commodity has been soaring. Spot coal is up 20% this year, in part because Japan is buying more of it to replace the output of nuclear power stations that have recently gone offline. Yet China’s electricity tariffs have risen only 2.5% this spring.

This mismatch has also been evident for the last half decade when coal prices have more than doubled while Chinese electricity charges have increased by only a third. As a result, electricity producers have been squeezed hard. Coal-fired plants lost 10 billion yuan during the first four months of the year. The chairwoman of China Power International, a utility, recently warned that a fifth of China’s 436 coal plants could go bankrupt.

Beijing created this crisis by fixing the price of electricity. At a time when inflation would be out of control were it not for price controls—formal and informal—Chinese leaders are especially determined to hold the line on power charges.

Technocrats can tell producers what they can charge, but they cannot prevent the inevitable. Because power companies are losing money generating each kilowatt of electricity, they have acted to minimize losses. They are not going ahead with expansion plans, they are not running at full capacity, and some of them are not running their plants at all. Many generating stations—an abnormally large number of them—are now closed for maintenance despite the desperate need for electricity.

Which businesses are getting juice? Technocrats in the Chinese capital can’t help but meddle, and they are favoring state-owned energy-intensive industries—chemicals, construction materials, iron and steel, and non-ferrous metals, for instance—over others—private businesses, exporters, and service industries. The result is that the economy is becoming even more dominated by the state.

It’s worth repeating that price controls have been futile experiments continually exercised by political leaders around the world for over FOUR centuries! The attempts to defy demand and supply always end in repeated failures which eventually penalize the citizenry.

Politicians and bureaucrats think that they can apply Lenin’s dictum where “a lie told often enough becomes a truth”. Unfortunately, such lies ultimately unravels in the face of economic reality. As Winston Churchill once said “The biggest mistake leaders can make is to give people false hope that melts like snow”. Such false hope has always been meant to obtain people’s approval over the short term. And overtime, this will likely turn into despair and rage.

In addition, like any redistributive measures based on inflationism, benefits accrue to the government at the expense of the private sector. Metaphorically speaking, China has been killing “the goose that laid the golden eggs”.

Chinese authorities appear to be blindsided by overconfidence, basking from her recent economic successes. Yet overconfidence is a conventional trait that hallmarks the pinnacle of the boom phase of the bubble cycle.

To add, China appears to be reverting back to her old ways which makes me even more a skeptic on predictions that China will trigger the end of “the Age of America” in 2016.

At the end of the day, the above developments only reinforce my view of the maturing phase of China’s bubble cycle. China may not yet implode, but the writings on the wall suggest that we are likely headed on that direction.