Making sense of Chinese economic data

For a long time, analysts and economists believed 8 per cent economic growth in China was necessary to create enough jobs to maintain social stability in the country. But China has fallen short of that line a few times now and there is no unemployment crisis. If anything, there is evidence of skills shortages in some parts of China.

The 8 per cent red-line myth has disappeared without a trace. But we are still wedded to some old analytical frameworks such as maintaining an unhealthy obsession with the Chinese manufacturing Purchasing Manager Index at a time when the services sector accounts for a far larger portion of the country’s economy (At the service of China’s rebalancing, April 26).

It is also fashionable to use the so-called Li Keqiang Index, named after the Chinese premier who is sceptical of the country’s notoriously unreliable official statistics and prefers to rely on railway transport and electricity generation data to gauge the true state of the economy.  However, it seems that even premier’s index is lagging behind the fast pace of change in China.

China’s economy is going through a painful period of adjustment as well as deceleration. On a brighter note, however, its economy is re-balancing in favour of a stronger services sector, healthier consumer spending and the emergence of internet-based innovation. As such, it is about time we discarded some of these out-of-date tools and adopted some new ideas when looking at the Chinese economy.

Guan Qingyou, a prominent economist and deputy head of the research at Minsheng Securities, a brokerage house, argues that analysts and policymakers need to update their toolkits to stay ahead of the game, and points out three examples of applying out-of-date techniques to the shifting reality in China.

1. The relationship between GDP and employment

The main reason Chinese policymakers care so much about the GDP growth rate is largely related to employment. The focus on delivering 7.5 per cent growth is based on the understanding that the country needs to maintain a 7.2 per cent growth rate to absorb 10 million new entrants to the labour market every year, according to the figure quoted by premier Li. 

However, this widely accepted understanding is somewhat lagging behind the reality.  Statistics shows that the correlation between GDP growth and job creation has been breaking down since 2010. We are seeing a curious situation where employment data remains strong while the economy is growing at its slowest pace in recent years.

Guan suggests this situation is due to the fact that China’s economy and labour market is undergoing structural changes. China may be the world’s factory but the services sector has overtaken manufacturing as the largest part of its economy, as well as its new growth engine. The services sector has better capacity to absorb new jobseekers, according to Guan.

More importantly, China has reached the so-called Lewis turning point: i.e. it is about to run of rural surplus labour. In the coming years, there will be less and less people entering the job market. Guan argues the real challenge for China in the future is labour shortage, not unemployment (Is a labour shortage looming for China?, February 28).

2. How important is the industrial sector to China?

One of the most widely watched Chinese economic indices is industrial production. Given the sheer size and importance of the country’s manufacturing industry, it is not hard to understand why. The industrial sector accounts for about 40 per cent of the country’s GDP and there has been a strong correlation between industrial production and the GDP growth rate.

However, recent data suggest the once-strong correlation has also started to break down. For example, the industrial production growth rate dropped from 9.7 per cent to 8.7 per cent during the first quarter of 2014 -- and it didn’t have noticeable impact on economic growth, which stayed around 7.4 per cent.  

This apparent inconsistency has sparked speculation about whether Beijing fudged the numbers to suit its political needs. However, Guan believes there is a more innocuous explanation for the breakdown in this relationship: the importance of the industrial sector is declining in China. For example, the Chinese economy grew 7.7 per cent in 2013; the services sector contributed 47 per cent of that growth, while the industrial sector contributed just a touch below 40 per cent.

It is interesting to draw a comparison between the 2013 and 2000 figures. At the beginning of the century, the industrial sector accounted for 58 per cent of GDP growth, while the services sector made up only 35 per cent. As China Spectator argued in an earlier piece about the declining importance of the manufacturing PMI as a gauge of the Chinese economy, we need to be mindful of the underlying changes in the economy to make better sense of it.

3. How good is the 'Li Keqiang Index'?

In 2007 when he was still the governor of Liaoning province, Premier Li Keqiang met the American ambassador and confided in him about his distrust of official Chinese statistics. Thanks to Wikileaks, we know Li prefers to track the economy by looking at other indicators: railway freights volume, electricity consumption and bank loans.

Many commentators and analysts have used the Li Keqiang Index to develop an alternative model of understanding the Chinese economy. But Guan argues that the reliability of the Li Keqiang Index is declining because of changes in the electricity generation sector and the financial industry.

He has made following observations: industrial electricity consumption is declining as companies opt for lower-energy-intensive production methods and improve energy efficiency; Beijing is actively phasing out high-energy-consumption and high-pollution companies; and household electricity consumption has increased.

Meanwhile, bank loan disbursement used to be a good indicator of economic activity in China as companies mostly rely on banks to finance their business activities. But we have seen a large increase in China’s informal banking sector, as well as an explosion in off-balance-sheet lending. Consequently, bank loans have become a less reliable indicator.