Rail freight and electricity data can be misleading

Li Keqiang’s two favourite indicators give a deceptive picture of the mainland’s slowdown

PUBLISHED : Monday, 03 September, 2012, 12:00am
UPDATED : Monday, 03 September, 2012, 9:23pm

I blame Li Keqiang.

When he was party boss of Liaoning province, the favourite to succeed Wen Jiabao as premier said he didn't trust official economic data.

The figures for gross domestic product, he dismissed as "man-made".

To get a more accurate picture of what was going on in his province, he said he preferred to look at real world indicators, including electricity consumption and rail freight volumes.

Ever since, analysts have been poring over the amount of electricity the mainland uses each month and the tonnage of cargo shifted on the country's railways in an attempt to work out how fast the world's second-largest economy is really growing.

Lately they have found a lot to worry about.

As the first chart shows, over recent months the year-on-year growth rate of the nation's electricity consumption has slowed to around 5 per cent, compared with rates well above 10 per cent a year before.

The only time in recent years that power demand has been weaker was during the slump that followed the international financial crisis in 2008.

The picture painted by rail freight volumes is even more ominous. As the second chart shows, the tonnage carried on mainland railways plunged by 6.8 per cent in July compared with the same month a year earlier. Again, that is the steepest fall since the depths of the economic crisis in late 2008.

Spooked by the decline of Li's real world indicators, some economists believe the country's slowdown in economic growth is far more severe than the official GDP figures imply.

A handful even think that its true full-year growth rate for this year will be under 5 per cent; a sharp contrast to the 7.5 to 8 per cent rate the majority of analysts are forecasting.

Happily, the outlook may not be quite as grim as they think.

This column has pointed out before that whatever Li thinks, electricity consumption is a poor guide to the mainland's economic growth.

That's because its heavy industries consume disproportionately large amounts of power.

Altogether, according to official figures, metal production - both ferrous and non-ferrous - accounted for 18 per cent of the country's electricity consumption last year.

With the mainland suffering massive overcapacity in both the iron and steel and the aluminium sectors, it only needs a few smelters to be switched off to cause a big slowdown in electricity demand.

But the impact on GDP growth will be relatively small. A back-of-an-envelope calculation suggests that last year aluminium smelters used around 5 per cent of all the electricity generated on the mainland to produce just 0.6 per cent of its GDP.

As a result, if you turn a few off, the slowdown in electricity consumption will not be mirrored by an equally large slowdown in growth.

But although the impact on GDP growth will be relatively small, idling smelters has a big effect on volumes of rail freight.

For a start, the fall in electricity consumption means less demand for coal to fuel the country's power stations. And given that in 2010 thermal coal made up 43 per cent by tonnage of all freight traffic on China's railways, it doesn't need much slackening of power demand to produce a big decline in overall freight volumes.

On top of that, another 13 per cent of 2010's freight traffic consisted of coking coal and metal ores being transported to steel mills and smelters, while a further 6 per cent was the refined metals leaving the mills.

So running a few steel mills and aluminium smelters at below capacity leads to a big slowdown in electricity consumption growth and a steep fall in rail freight volumes without much of an impact on the overall economy.

That doesn't mean the mainland's growth isn't slowing. It is. But it does mean the slowdown isn't as severe as Li's favourite indicators imply.