Doubts about the Official DataIn the eyes of many observers,China’s economy seemed to be entering a tailspin in 2015. And yet, the official GDP data showed a negligible slowdown in growth. The financial press pounced on these “questionable” statistics, citing a now-famous 2007 exchange between Premier Li Keqiang, then a provincial Communist Party secretary, and U.S. Ambassador Clark Randt. Li admitted that he preferred to assess the performance of his province’s economy by averaging the growth rates of electricity production, rail freight, and bank loans.
Imperfect AlternativesThese nonofficial indices are all based on assumptions about and models of the Chinese economy that are difficult to express, let alone test. As the chart below shows, the components of the Li Keqiang index—the growth rates of electricity production, rail freight, and bank loans—have followed separate trajectories over the past twelve years. Placing greater weight on any one of these inputs would produce a much different stream of GDP growth estimates.
We see that the growth rate of bank loans has been very stable over time, hovering around 12 to 13 percent year over year, except during the financial crisis of 2008 and its immediate aftermath. Meanwhile, the rail freight growth series has shown a sustained decline over the past twelve years, reaching a low point in December 2015. This precipitous deceleration was one reason that market participants one year ago were so concerned that official statistics were not reflecting the true state of the Chinese economy. However, there are more innocuous explanations for the decline of rail freight growth, such as the structural transition of the Chinese economy from heavy industry toward services.
Satellite ReadingsTo resolve these credibility issues, we need to develop a transparent, data-driven procedure centered on an independent gauge of Chinese economic growth. We argue that such a measure exists in the form of satellite-recorded data on the brightness of nighttime lights across Chinese provinces over time. It has been well established that growth in nighttime light intensity is a good proxy for economic growth.
Reweighting the Li Keqiang IndexWe find that the components of the Li Keqiang index should not be assigned equal weighting, as is typically supposed. In fact, our analysis indicates that bank loan growth should be given six to eight times more weight than rail freight growth, with the optimal weighting on electricity production growth somewhere in between these two. The implications of this reweighting on our optimal estimate of Chinese GDP growth are profound. We find that since 2012, our estimate of Chinese GDP growth was never appreciably lower, and in many years was higher, than the GDP growth rate reported in the official statistics. Adding other series besides those incorporated in the Li Keqiang index does not change our results. In fact, our estimate for Chinese growth shows an appreciable acceleration in 2016, even as the official growth rate remained virtually unchanged.
Some Cause for Concern
Is Credit Now Offering Less of a Boost to Growth?
Substantial Buffers Remain
Despite its vulnerabilities, China’s financial system has several features that reduce the associated risks. Unlike many emerging market credit booms that have ended in busts, China’s credit growth has been funded primarily by high domestic saving, mainly in the form of bank deposits. Chinese authorities have sufficient liquidity tools, including high required reserve ratios, the ability to extend short-term liquidity via an array of facilities, and a financial sector dominated by state-owned lenders and borrowers. China also has substantial fiscal resources to address losses in its financial system and among troubled state-owned debtors. This last consideration is very important; the Chinese government’s strong balance sheet should provide the necessary capacity to absorb potential losses from a financial disruption. Still, the speed and increasing complexity of the country’s credit growth suggest that there could be significant benefits for China in comprehensively addressing its banking system and in financial reforms.
(Hunter Clark, Federal Reserve Bank of New York’s Research and Statistics Group; Jeff Dawson, Federal Reserve Bank of New York’s Research and Statistics Group; Maxim Pinkovskiy, Federal Reserve Bank of New York’s Research and Statistics Group, Xavier Sala-i-Martin, Department of Economics at Columbia University.)
Hunter Clark, Maxim Pinkovskiy, and Xavier Sala-i-Martin, “Is Chinese Growth Overstated?” Federal Reserve Bank of New York Liberty Street Economics (blog), April 19, 2017, http://libertystreeteconomics.newyorkfed.org/2017/04/is-chinese-growth-overstated.html.
Jeff Dawson, Alex Etra, and Aaron Rosenblum, “China’s Continuing Credit Boom," Federal Reserve Bank of New York Liberty Street Economics (blog), February 27, 2017, http://libertystreeteconomics.newyorkfed.org/2017/02/chinas-continuing-credit-boom.html.Hunter Clark, Maxim Pinkovskiy, and Xavier Sala-i-Martin, “China’s GDP Growth May be Understated” NBER Working Paper No. 23323, April, 2017. Hunter Clark, Maxim Pinkovskiy, and Xavier Sala-i-Martin, “China’s GDP Growth May be Understated” NBER Working Paper No. 23323, April, 2017. http://www.nber.org/papers/w23323
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.