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For Japanese companies operating in China right now, the top worry isn’t a potential default of debt-laden property developer China Evergrande Group but the supply crunch that could be triggered by electricity shortages.

If industrial production becomes sluggish in China amid the power shortfall, Japanese firms will struggle to buy the components they need and have to trim planned output, probably eroding their profits.

“We don’t care much about the Evergrande shock because it is unlikely to cause actual harm to our business. This is merely a matter for financial market participants,” said Kota Watanabe, a worker at a major Japanese manufacturer in China.

“Market confusion will be resolved over time. But an electricity shortage following government restrictions would definitely have a negative impact on our practical operations in the long run,” Watanabe said.

In recent months China has been suffering from a severe electricity shortfall as the leadership — under President Xi Jinping, who has promised China will attain a peak in carbon dioxide emissions before 2030 — has strengthened measures to tackle climate change.

Several regions in China have been compelled to save electricity, while government regulations on energy consumption as well as higher coal prices have forced a large number of factories to suspend operations and curb output.

“Global semiconductor shortages have already been taking a toll on our production planning. A power shortfall would be the most serious problem for us,” Watanabe said.

Since manufacturers in China — the world’s factory — were dealt a crushing blow by supply chain disruption last year stemming from the outbreak of COVID-19, Japan’s government has been aiming to bolster production and consumption at home.

In March 2020, then Prime Minister Shinzo Abe said Japan should not over-rely on its neighbor for value-added manufacturing and products, calling on the country’s enterprises to relocate some of their factories from China to Japan.

Many Japanese companies have also shifted their production bases from China to Southeast Asia, given that the aftermath of the prolonged Sino-U.S. tariff dispute has cut U.S. demand for goods made in China.

Nevertheless, China is still Japan’s largest trading partner. And Japan’s dependence on China for intermediate commodities still exceeds 20% of imports, the highest level among advanced economies.

In August, Japan’s imports from China rose 23.2%, to ¥1.63 trillion ($14.27 billion), more than 20% of the total of ¥7.24 trillion. In the same month, its imports from the United States stood at ¥757.49 billion.

“We cannot do business without China,” said Reiko Ito, an employee of a Japanese carmaker in China. “If we cannot import or use components made in China, our business would be in a predicament.”

Takahide Kiuchi, executive economist at the Nomura Research Institute in Tokyo, said, “Foreign firms must be reminded of the risks in the economic and investment environment in China, affected by the Chinese government’s tightening control.”

Meanwhile, Western media — including U.S. and European dailies — have reported for days that a possible default by Evergrande, whose liabilities have swelled to around 2 trillion yuan ($311 billion), could spark an event comparable to the 2008 global financial crisis.

That earlier crisis, brought about in the wake of the collapse of U.S. securities company Lehman Brothers Holdings Inc., has been called the “worst in 100 years.”

A Japanese banker monitoring China’s economy, however, shrugged off concerns over a resurgence of the “Lehman shock” that originated from the 2007 U.S. subprime mortgage crisis, which led to a global credit crunch. Subprime loans are basically classified as high-interest mortgages offered to people with poor credit histories.

“The fundamental driver of the 2008 global financial crisis was a credit crunch, where banks scrambled for funds in money markets and private firms worldwide were not able to borrow money at affordable interest rates,” the banker in Beijing said.

“A bankruptcy of Evergrande would not cause such a tragedy, as it would not rattle the credit market — with numerous investors factoring in shrinkage of China’s real estate market,” he said.

Alliance Bernstein, an investment research company, said, “Despite fear-driven weakness in parts of the offshore Asia credit markets, we don’t see signs of a systemic crisis, which would be evident in China’s onshore credit market and interbank market.

“We believe that policymakers in China stand ready to act, should signs of contagion grow,” it also said in a statement.

“Through coordination with the large state-owned banks, and through potential policy adjustments, Beijing can help ease funding pressures for the property sector and help rekindle investor confidence,” it added.

Ito said, “As for Evergrande, we all think the Communist Party will eventually try to support the real estate sector and the property developer, so we are careful not to be swayed by excessively pessimistic and anti-China reports from Western media.”

Late last month, Evergrande — which owns a popular soccer club in China — said it would sell non-publicly traded domestic shares in a regional bank to a state-owned enterprise. The transaction is regarded as effective financial aid by the government.

China’s central bank, the People’s Bank of China, has also pledged to make efforts to protect the “sound development” of the nation’s real estate market.

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