Some years ago WikiLeaks leaked a memo from 2007 where the future Premier of China, Li Keqiang, stated that he didn't trust the GDP numbers in his province of Liaoning, and used electricity numbers, rail transport, and loan growth to measure economic activity. Those measures would have been good indicators of activity in Liaoning over ten years ago, but the three have less relevance in China's current broad GDP. Shortly after the WikiLeaks memo around 2010 a number of outlets began publishing various Li Keqiang based indices that track the changes in those three Li favored measures over time in one combined index. For an example, see the chart at the bottom.
After seeing a column make mention of the "Keqiang" index recently, I wondered why anyone would still be using it. Here is why:
Rail transport numbers:
Rail freight was roughly 8.7% of total freight traffic by the end of last year. Rail trails road and waterway freight by a wide margin. So, it doesn't represent a broad reflection of the whole economy. On top of that coal is roughly half of total rail freight tonnage. As coal use declines, so does rail volume. Forcing coal fire plants and inefficient industrial firms to shut down for the "war on pollution" exacerbates already slowing coal demand.
Electricity numbers:
First, 70% of electricity comes from coal burining, so you are doubling up on your coal exposure with the Li Keqiang index.
Second, heavy industry accounts for more than 60% of electricity usage. Services and consumption are only about 10 to 12% each. Many of those firms in heavy industry production are highly inefficient. As heavy industry slows and firms shutter overcapacity, electricity slows much faster than overall growth.
Third, efforts to increase energy efficiency have added to electricity usage slowdowns as well.
Bank loans:
Bank loans comprise the largest share of outstanding credit, but other forms of credit are growing in importance. The growing bond market, shadow banking, share issuance, and other forms of non-banking credit would not be included in the index, leaving out key growth drivers.
State owned banks also often give priority to state owned inefficient firms, so the index would be biased to tracking state owned enterprise activity. 46% of bank loans go to state owned enterprises. Only 23% of bank loans go to small enterprises, a group that constitutes 60% of the economy. The bulk of the economy gets lending from non-traditional sources, not represented in the "Keqiang" index.
So the index is mostly a measure of coal usage, and additionally a measure of heavy industry. The measure also relies on traditional bank lending in a banking system dominated by state owned firms. If you export coal or are concerned with heavy industry and smelting activities by state owned firms, then this is the index for you. But, there is more information value in some of the components of industrial production for monitoring coal and heavy industry.
The "Keqiang" index is a bad index to follow, especially for an economy that now gets most of its growth from the service sector, 49.5% currently, with 42% coming from industry. There is no meaningful information about services and consumption in the "Li Keqiang" index, another major flaw.
There are much better alternative measures of China's economic activities out there. Check out my GDP tracker in the "charts and tables" page, as an example of one.
When using the "Keqiang" index to illustrate that China's GDP number is not believable, keep in mind that rail, electricity, and bank loan numbers come out of Beijing as well, and could also be subject to manipulation.
This is not an endorsement of China's data. But, if we are going to call into question China's data, the Li Keqiang index is the lazy person's smoking gun. The issue deserves more statistical rigor than simply bunching together three simple numbers.
And as a side note, there was a Fed paper written a few years back on the reliability of China's GDP numbers, and the conclusion was that the numbers are reliable. Here is the link:
The subject of China data reliability will be included in a future blog.
Li Keqiang chart on the right: Did China really grow at 30% in 2010 and 20% in 2005? If so, GDP is currently understated and debt to GDP is only 165%.