While China may be making steps to make its economic data more transparent, doubts about its reliability persist. The ability to push out data at a rapid pace, and it always seeming to print around market consensus, has led to many in the markets to look for other sources to determine what exactly is happening in the Chinese economy.
One favourite measure that has been widely used in recent years has been rail freight volumes, simply the amount of cargo being whizzed around the country. It’s a metric that has plenty of fans, and understandably so. Along with electricity consumption and bank lending, it makes up the three-pronged Li Keqiang index, an alternative economic activity gauge used by many China analysts.
In 2007 current Chinese premier Li Keqiang, then Party Committee Secretary of Liaoning province, stated that the GDP figures in his province were unreliable, preferring instead to look at alternative metrics, such as railway cargo volumes, to determine what was really happening in the economy. The admission led to the creation of the Li Keqiang index. As the chart from CBA shows below, it has consistently underperformed official economic growth data in recent quarters.
However, with China’s economy currently transitioning away from industrial-led growth to that powered by services and consumption, perhaps the days of the Li Keqiang index are numbered.
That’s certainly the view presented by China’s state-run People’s Daily newspaper, a well-known mouthpiece for the Chinese government, which suggests that falling freight rail volumes are not due to declining economic activity but rather China’s economic transition, as increasing use of green energy reduces the need to haul coal across the country.
“The percentage of green energy consumed in China has increased in recent years,” said the newspaper.
“Eco-friendlier sources such as hydro, wind, nuclear and natural gas made up 16.9% of total energy consumed in 2014, a 3.5% increase compared to 2010. The development of new energy has reduced demand for both thermal power and coal.”
The decline in coal demand, evident in thermal coal import data released for August, is resulting in rail cargo volumes falling across the country.
“In 2014, volume of coal transport fell 2.3% year-on-year, resulting in a 1.2% decrease of railway freight. Between January and August in 2015, shipping of coal cargo fell 11.4%, leading to a 6.1% drop of overall railway freight,” it said.
Not only that, the paper suggests that the slowdown in electricity consumption is not due to weakening economic activity, but rather the economic transition away from industry to services-led growth.
“The slowdown in electricity consumption growth rates is the result of a rising service industry, industrial transformation and upgrades and improvements in energy utilization.”
While on face value the changing Chinese economy would naturally see demand for electricity, coal and cargo volumes fall, which explains recent weakness in the Li Keqiang index.
But it is not the decline in industrial-based indicators that has created nervousness over the outlook for Chinese economy in recent months.
Instead, it is widely held that industrial activity is slowing. The fear that many have expressed is that the services sector – perceived by some to be a harder sector to measure in terms of economic output – is failing to offset the slowdown in industrial activity.
In a research note released earlier this week, analysts at MFS Investment Management picked up on this concern.
“China may not be as dominated by services, but we believe this sector is growing much faster as a share of the economy than it was five to ten years ago. And its contribution to growth is generally much harder to measure,” they wrote.
“As long as China’s GDP accounting continues to focus on the production of countable goods while underestimating uncountable services, GDP measures are likely to be confusing.”
Like MFS, analysts at Nomura also believe that services and consumption growth is accelerating at present, but not at a sufficient pace to prevent a slowdown in overall economic growth.
“Economic growth is now being driven more by consumption and the service sector, rather than investment and related manufacturing sectors,” they wrote in a research note released earlier this week.
“However, an inevitable result during such a rebalancing process is that the speed of growth will be much lower than before,” they note.
That’s the question that investors continue to grapple with – just how slow is China’s economy growing at present, and what will the outlook for the economy be should services and consumption falter?
It has rattled markets over recent months, and will likely continue in the period ahead.
While the economic transition partly explains the weakness in cargo volumes and electricity usage, something that may make the Li Keqiang index redundant in its usefulness, it is the opaque nature of service sector data that analysts and investors are more concerned with at present.
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