China’s GDP: no easy leading indicator

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China’s GDP: no easy leading indicator
by Rahul Jacob Rahul Jacob

Economists the world over have been parsing over China’s economic data for years to see if the government has been “adding water” – to use the Chinese phrase – to boost growth numbers. The consensus is that although the numbers of provincial governments don’t always add up, China’s economic data have been getting better.

With investment now making up roughly half of GDP growth, Stephen Green of Standard Chartered undertook to find an appropriate proxy to credit growth as a leading indicator of investment.
Other economists have done this with GDP data, using proxies like electricity consumption and freight movement to see if the bigger numbers make sense. Green sought to use data on sales of excavators and wheel-loaders and cement production as clues to the way investment is headed over the next few months.
“Such machines are used to dig holes and move earth and gravel and are therefore essential for building roads, real-estate projects and mines,” writes Green. “Surely companies would buy lots of them when they saw a wave of new investment on the horizon.”

Logical enough but, as so often is the case, he found the thesis didn’t hold in China. He found that sales of such equipment were in fact a lagging indicator, probably because companies wait till they are “maxed out” on building projects before they invest in new machines. To complicate matters, Green found that households had invested in such machinery on the basis that a few years’ renting it out would provide “a better return than a bank account”. Go figure.
Growth in cement production, generally a good proxy, was also found to march in step with real investment growth so was not as useful in predicting how the next six months would play out. Cement production grew 7 per cent year over year in the fourth quarter of 2011 and crude steel production by just 3 per cent.
After all this economic sleuth work, Green says he concluded that credit growth was probably the best leading indicator after all. Here the news is not good; the ministry of railways is slowing payments to its suppliers, while real estate developers are delaying payments for materials and delaying land lease payments to local governments. Local governments themselves are having their loans rolled over, “limiting the amount of new funds that banks can lend out,” Green says.
But it is worth then asking what the leading indicator is for credit growth in China. The answer? Government policy. Unfortunately, there is no easy way of measuring that.

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