Choo-choo Index better measure for China's economy
with Jake van der Kamp
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.
Then there is the problem that this WikiLeaks leak dates to 2007. Look at the first chart again and notice how in 2009 lending growth was allowed to rise above 30 per cent in order to counter the effects of worldwide financial trouble on China's reported GDP growth rate.
Lending growth, in other words, now appears to have more of an inverse than a direct correlation with China's economic performance. It may have worked for Li in Liaoning pre-2007. It doesn't work for China overall today.
But the other two indicators, power consumption and volume of rail freight shipments (isn't it odd how it's called cargo on a ship and shipment on a rail car?), look more reliable. I've given the growth rates for each a 50 per cent weighting for the second chart.
This chart says that China's growth rate from 1980 to 2000 was less than officially recorded, nearer 5 per cent annually than the claimed 10 per cent, and may even briefly have been negative in 1998.
Massive domestic and foreign investment then helped pushed this growth rate to double-digit levels that may have been even higher than claimed until 2008.
The correction in 2009 was deeper than admitted but the recovery from it has, initially at least, been more pronounced than claimed. I think the story that this second chart tells may be the right one. Li is not the only person to scorn the official GDP figures, and electricity consumption has always proved a good proxy for GDP growth, as have different measures of goods transport.
I shall call my indicator the 'Choo-choo Index' as I appreciate Li having pointed out that volume of rail shipments is the data series to follow and I shall dedicate it to Julian Assange in honour of his efforts to knock the secretive pomposity out of the diplomacy trade.
Remember that you got it from me. The Economist doesn't approve of WikiLeaks although is happy to use what it has leaked. Look up 'hypocrisy' on that one.