China’s historic heatwave and its global economic consequences
Rivers dry up as heatwave bites
The trigger issue is China’s unprecedented heatwave, which has resulted in a severe drought and dramatically drier rivers. For more than two months, this has interrupted water supply across the country, in turn halting hydropower generation and limiting electricity supplies to cities. With temperatures of around 40° Celsius (“the highest recorded since full meteorological records began to be kept, in 1961), lasting more than 60 days, nothing like this has ever been ever seen before.
The impact has been significant. To protect an overloaded power grid, office buildings in two cities had to turn off their air conditioning, while other parts of southern China were forced to limit electricity supplies. The resulting factory closures impacted Foxconn, an Apple supplier, and Toyota. Volkswagen closed its factory in Chengdu, causing production delays.
The increased use of air conditioning has further increased energy demand and lowered the Yangtze River's water levels, whose hydroelectric dams provide electricity to many regions.
Impact on crops and even eggs
And the impact isn’t limited to factory production. These climatic changes are significantly reducing rice tea crops and other crops. Farmers have been trying to protect their crops from the intense heat by covering them with nets and preparing for the fall harvest. Even egg production has been affected as chickens struggle to lay eggs in the heat. Egg prices have surged across the country. The heatwave has also led to numerous wildfires across China, sweeping through southwestern, central, and eastern parts of the country in the past few weeks.
These developments led China to issue a red alert heat warning, the most severe of the four color-coded categories, to at least 165 cities and counties nationwide. The government issued the second-highest orange alert warning to a further 373 cities, emphasizing that temperatures above 40° Celsius were anticipated in these places during the daytime and advised people to avoid any outdoor activity.
Is the bet on hydro about to backfire?
These impacts present alarming risks for both China's economy and the global economy. One of the main issues is the impact on China’s rivers and waterways, which power some 45% of the country’s economic output.
The country has made a large-scale investment in hydropower, with local dams accounting for approximately 80% of the energy requirements in the eastern provinces. Before China became a major producer and installer of solar and wind power, the focus was on expanding hydropower generation. This prioritization resulted in hundreds of small generators built on the country’s major rivers and tributaries.
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The Yangtze River, the world’s third-longest river, is one of the most important hydropower sources. As a result, the majority of companies have chosen to locate nearby. However, the Yangtze’s low water levels are now causing difficulties for shipping and trade.
Impact on the economy and social stability
Moreover, although the economy was already affected by the stringent lockdowns imposed in important cities as part of the nation’s zero-Covid plan, these new restrictions based on ecological risks are creating higher rates of youth unemployment and problems in the real estate market.
The impact on Shanghai gives a sense of the scale of the problem. As both a major manufacturing and financial hub, Shanghai has been significantly impacted, leading GDP growth to fall to 2.6% in the second quarter of 2022 compared to the first three months. China's 5.5% growth goal this year is being hampered by this.
The takeaway: another driver of global instability
All these factors increase uncertainty about the world’s economy, adding more pressure to global problems like the war in Ukraine and droughts in Europe, among others. This, in turn, is further fueling high energy and fuel prices, food insecurity, and other consequences that must be closely watched.
At present, it is hard to estimate the real impact of these latest issues. However, there is no doubt that the current situation is contributing to high global inflation, import and export challenges, and unpredictable recessionary dangers.
Written by: Natalia Guzman and edited by Ana Rodriguez
*This article is informative and is not to be used as legal, economic, or commercial advice.