How to measure China’s real economic growth

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WLi Keqiang chicken, the Chinese Prime Minister, his last speech at the National People’s Congress on March 5, it was already clear who will succeed him. But no follower has yet been found for the “Li Keqiang index”. This unofficial proxy for China’s economic growth was inspired by a loose conversation between Mr. Li, when he was party secretary for Liaoning province, and an American diplomat. Mr. Li admitted that the province gdp the figures were “unreliable”. Instead, he focused on electricity consumption, rail freight and bank lending. Taking our cue from Mr. Li, this newspaper thought it would be fun to see what the three indicators, in one index, revealed about China’s economy at a national level.

The index has had a great run since its introduction in 2010. A version on Bloomberg has its own “ticket”. He promoted a similar index for India. Teams of researchers at the Federal Reserve Bank of San Francisco and separately at the New York Fed have tested the usefulness of Mr. Li’s preferred indicators. A paper published in 2017 by Hunter Clark and Maxim Pinkovskiy of the New York Fed, along with Xavier Sala-i-Martin of Columbia University, calculated that the best combination of the three indicators weighted loans by about 60%, 30% to electricity. and 10% to rail freight. In a subsequent paper, Mr. Clark, Mr. Pinkovskiy and Jeff Dawson of the New York Fed proposed replacing loans with loans. m2, a measure of the money supply, as bank credit figures failed to capture the government’s crackdown on shady loans.

Critics argue that the reduction in the energy intensity of the Chinese economy weakens the index. But that’s not quite true. As long as electricity follows a recognizable trend, deviations from the trend indicate economic booms and busts. What really broke Li Keqiang’s index was the covid-19 pandemic. The declines in retail sales, air travel and the real estate market were far more dramatic than the slowdown in business, electricity use or rail freight. At the same time, m2 grew quickly at the end of last year as people were crowdfunding.

What are the other options? Those who doubt China’s data want to escape their statistical system altogether. Perhaps the brightness of the lights at night, recorded by satellites, could offer a truly independent guide to growth? But this step has its own problems. The latest satellites do not have a long history and the older ones struggled to distinguish between the bright and very bright lights of the cities. The coverage is also inconsistent from month to month.

Instead, Mr. Pinkovskiy and his co-authors have used light at night not as a direct measure of growth, but as a way to judge between other proxies. If the contestants are good at tracking lights at night, they should be good at tracking growth as well. The authors’ studies suggest that in addition to borrowing (or m2), electricity and (to a lesser extent) rail freight, retail sales is a useful indicator. Adding them would certainly have made a difference during the pandemic.

A diplomatic cable has yet to come to light showing the best signs of China’s new prime minister, Li Qiang. He was previously the party leader of Shanghai, where services make up about three quarters of it gdp. The equivalent number in rust-belt Liaoning was only 40% when Li Keqiang first revealed the ingredients of the index named after him. It is safe to say, then, that any “Li Qiang index” will not ignore the services sector of China’s economy which has changed dramatically.

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