Mark Lister, 3 May 2018

Trying to get a handle on what’s really happening in the Chinese economy has always been difficult, given how opaque it is. The official statistics are only somewhat useful, as the authorities simply tell us what they want us to hear.

Take the most commonly watched measure of economic growth, for example. March quarter gross domestic product (GDP) growth was in line with expectations at 6.8 per cent, the same as the previous quarter and little changed from the past couple of years.

China released these numbers in mid-April, just 12 business days after that three-month period ended. That’s an impressive feat, given the size of the Chinese economy and all the data collection the statisticians no doubt have to collect.

The United States certainly can’t calculate their growth figures that quickly. It was another ten days before we saw their advance estimate of GDP for the same period. What’s more, they’ll release two formal revisions to those numbers, fine-tuning them as more information comes to light.

The final figures for the US won’t be out until the last week of June, almost a full three months after the period they cover has finished. Yet the Chinese boffins can work it all out in 12 business days, without any need for revisions. No wonder none of us trust their numbers.

Investors must keep a close eye on other indicators, even though the headline figures suggest steady. One measure I follow is the Li Keqiang index, named after the Premier of the State Council in China.

Some years back, when he was Party Committee Secretary of Liaoning, Li famously remarked to the US Ambassador that the GDP data for his province was 'man made' and unreliable. Unfortunately for him, a transcript of that private conversation was released in 2010 by Wikileaks.

I’m not sure if we should be concerned or comforted that the Chinese authorities are as cynical as we are about their data. Regardless, Li said he instead watched three things to take the pulse of the economy - rail freight volumes, electricity consumption and bank lending.

When economic activity is strong, goods are being transported around the country, factories are using more power as production ramps up, and banks are lending more money.

The Economist magazine created the “Li Keqiang index” which combined his three preferred indicators for tracking the fortunes of the economy. While it broadly lines up with official figures over longer periods, during shorter timeframes it suggests the Chinese economy is much more volatile.

At the moment, it’s telling us China has lost momentum during recent months. While the rate of GDP growth is unchanged over the last few quarters, in March the Li Keqiang index fell to the lowest in almost two years. Having signalled a robust expansion for most of last year, it has since tapered off to imply the weakest pace of growth since June 2016.

That doesn’t necessarily mean we’re heading for a hard landing, but it’s certainly something to watch. China is our biggest customer when it comes to good and services exports, and it’s arguably more important for keeping the global growth story intact than the US.

This article was originally published in the NZ Herald under the title 'Mark Lister: The truth about Chinese economic growth' on 29 April 2018.