Economic conditions in the world’s second largest economy improved sharply in the first quarter of this year, according to the Li Keqiang Index — an alternate measure on Chinese economic growth.
The index is named after Chinese premier Li Keqaing who, as party committee secretary of the Liaoning province in 2007, told a US ambassador that local GDP figures were unreliable, preferring instead to use growth rates of electricity consumption, loans and rail freight to gauge what was really happening in the economy.
The chart below, supplied by the NAB, shows the clear acceleration in the index at the start of 2016, suggesting activity is accelerating. In the NAB construction of the index, the bank gives power consumption the largest weighting, followed closely by loan growth.
Although there are obvious problems associated with the index — the services sector being the largest component of the Chinese economy being just one — the NAB believes that it still provides a way of corroborating signals coming from recent manufacturing purchasing manager’s surveys released in recent months.
The main driver seems to have been power consumption, which accelerated sharply in February and March, NAB says.
“Growth in total loans has actually slowed slightly, with freight growth still in the red but stabilising. This does seem to support what the manufacturing PMIs are saying – that sequentially, production is improving, but that levels are still weaker over the medium term,” the bank concludes.
While the pick up in the index signals economic conditions are improving, the NAB, like others, believes the reaction from policymakers creates more questions than answers.
All this seems to have offered some succour for both the manufacturing sector especially amongst state-owned enterprises (SOEs) and the real estate sector,” says the bank, adding that it “does smack of the old model of wanton reflation”.
While others believe that policymakers panicked at the beginning of the year, pumping out loans and ramping up infrastructure investment akin to the old China growth model of prior years, the NAB does not believe the rebound in the industrial sector signals a shift in stance towards economic rebalancing.
“While real estate investment did accelerate in March, it does not appear that the authorities have suspended their drive to shift the economy onto a different track,” the bank says.