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Why air miles and other indicators offer clues to China’s new economy

The growth in consumption as a component of the economy highlights the need for a new approach that better tracks the consumer

PUBLISHED : Friday, 16 October, 2015, 9:14am
UPDATED : Friday, 16 October, 2015, 3:48pm

Cash withdrawals by ATM banking cards and the number of air miles clocked by the millions of passengers taking to the skies annually might be a better indicator of the health of the new economy in China than traditional measurements used by economists, analysts said.

By looking to new spending and consumption patterns, the idea is to better gauge the drivers of an economy as it transitions away from the traditional investment-led growth model.

A report issued by Jefferies China research last week highlighted the necessity of using a new methodology when analysing China.

“The problem is that much of the data the market fixates on — electricity production, freight rail, bank loans, manufacturing PMI — are proxies for investment/manufacturing, the old growth model. The market has not focused on proxies for consumption/services, the new growth model,” the report said.

Even consumption itself is undergoing changes. For example, retail sales figures provide a gauge of consumer spending, but they don’t track the rise of services as a component of the overall economy.

This argument is echoed by Nicholas Lardy, an expert on Chinese statistics at the Peterson Institute for International Economics. He notes that services account for as much as two-fifths of China’s consumer spending.

To help sort out this blind spot, Jefferies analysts came up with a suggestion. They propose nine new indicators as a way of filling the gap in traditional data.

These include ATM bank card spending, box office receipts, air travel miles clocked by civilian passengers, logistics express delivered, gasoline and kerosene usage, residential and commercial electricity usage, waterway and railway traffic, small and micro-enterprise profitability, and Baidu’s small and medium enterprise vitality index.

Without offering an opinion as to whether these key indicators show that consumption is strong enough to offset the slowdown in industrial activity, Jefferies noted simply: “using infrastructure should be easier than building infrastructure”.

Chinese households are spending a growing proportion of their income on healthcare, transportation, telecoms, and education/recreation, while consumption of food, clothing and other household goods is shrinking as a percentage of total spending, according to official statistics cited in the Jefferies report.

“China has surely invested too much with overcapacity strewn across the industrial landscape, depressing state-owned enterprises’ returns and accumulating a large debt overhang. This unbalanced economic state is certainly worrisome and has been the subject of derision and hand-wringing not just among economists but also among China's leadership,” the report said.

Jefferies said they were optimistic that China could avoid the fate of some emerging markets which have succumbed to the "middle income trap". The concept, first put forward by the World Bank in a 2006 report on developing East Asia economies, is sometimes used to describe the slower growth momentum in Latin American, following a period of rapid economic expansion in the region.

Jefferies said that growth momentum fizzled in Latin America and other nations out because of "their inability to invest in infrastructure, diversify their industrial base and upgrade their output — quite the opposite of China's problem.”

Australia and New Zealand Banking Group said in a report this week that they expect spending by China’s urban middle class to more than double in the next 15 years. By 2030 consumption will account for almost half of the economy.

“By way of comparison, that means China’s consumption in 2030 would exceed GDP in the US today…(it) could help rebalance the global economy, especially if it reduces its reliance upon the US consumer as a final source of global demand.”

“Potential risks to these projections include delays in the liberalisation of China’s financial system or delays in the implementation of the reforms,” the ANZ report said.

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