Choo-choo Index better measure for China's economy

When evaluating [Liaoning] province's economy, [Vice-Premier Li Keqiang] said he focused on three figures - electricity consumption, volume of rail cargo and the amount of loans issued, a confidential memorandum released by whistle-blower website WikiLeaks said.

'By looking at these three figures, Li said he can measure with relative accuracy the speed of economic growth,' the cable said. 'All other figures, especially [gross domestic product] statistics are 'for reference only', he said smiling.'

South China Morning Post, December 8

I hate to be scooped but I sat on this one too long before coming up with the idea of replicating Li's three indicators for all of China. The Economist magazine beat me to the punch by creating its own 'Keqiang ker-ching' index.

Then again, the editor of The Economist told me when he was in town a few weeks ago that the word 'economist', at least as his magazine uses it, was only 18th-century speak for politician. This does not surprise me, given how much he allows his journalists to indulge their fascination with the gossip of palace politics. I don't think the magazine's Keqiang ker-ching index looks right. I shall thus present my own version.

The problem lies in the indicator on loans. It creates a comparison of apples and oranges. Loans are stated in dollars of the day and can thus be hugely affected by the trend of inflation, while electricity consumption and tonnage of rail cargo are volume figures not subject to inflation. A tonne of coal is a tonne of coal whether the price stays the same or doubles from one year to another.

This distinction is particularly notable before 1998 when inflation in China was generally higher than it has since been, on two occasions rising above 25 per cent. As the first chart shows, the growth of lending was much higher before 1998 than real (that is, inflation-adjusted) GDP growth, so much higher as to call the validity of such an indicator into question.