Yesterday was a beautifully clear day in Hong Kong. For a city that has grown used to a thick haze of pollution, the sky was an uncommonly crisp, fresh blue. From the waterfront offices of Causeway Bay, you felt you could almost reach out and touch Hong Kong's highest peak at Tai Mo Shan, a full 15 kilometres away. Unfortunately the fine conditions won't last. When yesterday's easterly breeze eventually backs northerly, it is likely to bring down with it an even fouler cloud of pollution than usual from Guangdong. And the reason will have everything to do with the mainland authorities' misguided approach to battling inflation. As summer approaches, the mainland is once again facing crippling electricity shortages. All in all, China is expecting a country-wide supply-demand mismatch over the coming months of up to 50 gigawatts, or almost 10 per cent of total production at the rate electricity was generated in April. In a move reminiscent of 2004's power shortages, the authorities in some provinces have already imposed electricity rationing, with small manufacturers forced to cope with power cuts lasting up to 12 hours at a time. Curiously, however, unlike in 2004 the problem this time around is not a shortage of generating capacity. As the first chart below shows, Beijing has invested heavily in electricity generation facilities over recent years, with capacity now exceeding demand. The trouble is that not all that capacity is being used. Lots of explanations have been advanced for this, including abnormally low water levels in the country's rivers, which are preventing the mainland's hydroelectric plants from generating at their usual capacity. But the main reason for the mainland's electricity shortages is the market distortions produced by Beijing's attempts to defeat inflation by imposing price controls. Price controls are nothing new on the mainland. For years Beijing operated strict controls on the price of coal to supply cheap energy to the country's factories. But by holding down the price of coal, Beijing reduced incentives to invest in the country's mines, which remained in the dark ages with a fatality rates 50 times as high as South Africa's. In response, Beijing liberalised coal prices. But in order to contain inflation, it has retained controls on the electricity tariffs charged by the power generators. So, while coal prices have soared, more than doubling in the last five years, average electricity tariffs have only been permitted to increase by a third (see the second chart). As a result the coal-fired power stations responsible for generating 80 per cent of the mainland's electricity are losing money hand over fist. As the price of coal rose to more than 800 yuan (HK$955) a tonne this month, the coal-burning plants owned by China's five main generating companies announced losses of 10 billion yuan for the first four months of the year. And the more electricity they generate, the more money they lose. Not surprisingly, that acts as a powerful disincentive to run power stations at their full capacity. The result is a national electricity shortage, and the rolling power cuts that are already affecting companies in some parts of the country. That's bad news for Hong Kong. With the blackouts only expected to get worse, many manufacturers in Southern China are preparing again to fire up the diesel generators they relied on during China's last round of power shortages. That should help keep the production lines running. But diesel is filthy stuff, and tens of thousands of small generators produce vast quantities of atmospheric pollution, much of which will roll down towards Hong Kong if the wind backs to the north. So enjoy the view while you can, it's unlikely to last.