Keep a close eye on China's power slowdown

Overall industrial production was a little weaker at 10%YoY in November, but what was more interesting was the slip in power generation in the month, with growth rates dropping from ~8.5% to 6.8%YoY in the month.

Power generation perhaps gives a better guide to the realities of industrial activity and is one of 3 variables that current Premier Li Keqiang highlighted as best gauging activity in China.

The slip in power generation in 2012 serves as the most recent period where this signal proved to be very important.  This was largely unexpected and was probably the first key marker of softer activity through to the end of the year.

Fortunately we can get a decent read on power generation intra-month via coal burn statistics.  Coal's share of generation fluctuates depending on hydro availability, although hydro generation trends are predictable enough from a month to month basis to get a pretty good idea of the direction of overall generation via coal burn.

As the chart on the left shows, the smaller sample matches the moves in the NBS data fairly well, although the moves into negative territory were more extreme.  Perhaps this is more representative of reality than the NBS data.

The key point where things fell apart in 2012 is shown on the chart on the left where the blue line crossed the grey 2011 in April.  These data were available well before the industrial production were released.

The fall in coal burn in 2012 was certainly affected by stronger hydro generation although overall growth still dipped into negative territory by mid year regardless.

Hydro generation is weak this year relative to last and seasonally it also contributes less to generation in winter.

So far coal burn is still growing, although it has been weaker than the prevailing trend in the last 20 days.  Funnily enough this lower trend emerged post the Third Plenum discussions which were supposed to be very positive for activity.

So this is a data point that is well worth keeping an eye on over the next month or so.  The implications of weaker coal burn are not just to coal, but are likely to have significance to the broader macro picture as well. Further weakness here in the next 10-20 days would raise alarm bells, while a recovery towards the dotted-line would suggest November was just a blip.