China's economic growth speeds up?


Linda Yueh explains how China is seeking to rebalance its economy

China's economy sped up in the July-to-September quarter to expand at 7.8% year-on-year, according to official gross domestic product (GDP) figures.

That's faster than the previous quarter when GDP grew at 7.5% and the January-to March quarter's 7.7% expansion.

Unless the fourth quarter tanks, it means that the Chinese government will hit its growth target of 7.5% for the year, as the growth rate for the first nine months came in at 7.7%.

If they were to hit the target, it would be the slowest growth rate since 1999 which was the aftermath of the Asian financial crisis.

The Chinese government is aiming for a slower and better balanced economy that can grow more sustainably.

Reliability factor

But, one thing that hasn't changed is that there are more questions than ever over the reliability of Chinese figures.

It's not just GDP, but the other data releases today have also come in largely as expected: industrial production rising 10.2% from a year earlier in September, retail sales up 13.3%, fixed asset investment grew by 20.2%.

I've written about the trouble with Chinese figures before, particularly when it comes to GDP.

But, how good are the three indicators reportedly espoused by China's premier Li Keqiang as being more reliable? They are gaining prominence as they are being used by banks such as Credit Suisse and JPMorgan as an alternative index for Chinese growth.

The first indicator is electricity usage. The amount of power used by households and firms is a good gauge of consumption and one that is hard to hide. One problem is that China subsidizes some prices so it's somewhat mis-measured, but it's a decent economic indicator. Credit Suisse estimates it's around 9% annualised growth.

What is China's 'Li Keqiang Index'?

The amount of cargo freight is the second measure. Instead of factories saying how much they've produced (recall that they have been chastised for faking figures in Yunnan and Guangdong provinces this year), it's more reliable to take a look ourselves.

Railway cargo volume shows how much has been manufactured and is being moved around the country. But it is an under-measurement of economic activity because it only captures around 40% of GDP - the biggest part of the Chinese economy now is services. Cargo freight volumes are growing at around 21%.

The final gauge is bank loans. How much households and firms borrow over the medium and long-term reflects the amount of demand in the economy for investment.

This is why it's a good indicator of economic activity. But if this is used unproductively to build ghost cities, then it's a different way of over-stating growth. These loans are growing at about 5%.

Continued debate

It's not just Western banks that look at this data.

I understand from Chinese government researchers that a rule of thumb is if the Li Keqiang indicators show about 10-11% growth, then real GDP growth would be around 7-8%.

In which case, today's GDP figure would be consistent with the Li Keqiang index and show that the Chinese economy is speeding up.

But, there are others who are convinced that Chinese officials won't miss (bar an external crisis that can be blamed) a growth target, so none of these government-produced figures are very reliable.

Plus, none of these indicators, even viewed together, would be able to give a complete picture.

One thing is clear is that this debate is sure to run and run.

For the Chinese leadership who are keen to show that they're cracking down on fraudulent data and increasing confidence in the economy, it would help if they could indicate why they are well-equipped to produce GDP figures faster than any other major economy in the world.

Doing so in just over 2 weeks is a fairly remarkable feat for any country, much less one with 1.3 billion people. That's a lot of data to process in a rather short period of time.

Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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