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By Tom Orlik|
China's Vice Premier Li Keqiang said in 2007 that the GDP data for the world's second largest economy was 'man made' and not to be trusted. Instead, the then Party Secretary of Liaoning Province said, he relied on electricity production, train freight and bank loan data as a guide to the state of the economy.
Last month, CRT looked at the strengths and weaknesses of China's GDP data, concluding that the government's methods for calculating the size of the world's second-largest economy had improved but still left something to be desired. Are electricity statistics a better guide to growth?
Electricity output has a special place in the world of China's economic data. Officials might lie, it is believed, but volts do not. Ever since economists cried foul on the 1998 GDP data, citing the difference between falling growth in production of electricity and stable growth in GDP, the markets have viewed the electricity data as a proxy for overall growth.
That makes some sense. The manufacturing and industrial sectors are major consumers of electricity; changes in output should be reflected in changes in electricity production. Over the last several years, growth in electricity output has moved more or less in line with growth in industrial output.
With some of China's main growth indicators putting in a dismal performance in the last few months, and concerns about a hard landing for the economy, the electricity data provides an optimistic counterpoint. Following a weak April and May, electricity output was up 16.2% year-on-year in June, suggesting a strengthening economy. That contrasts with a weak reading from the preliminary HSBC PMI report in July, which suggested contraction is on the cards.
But before breaking out the celebratory baijiu and heading out for karaoke, China's economic policy makers should consider a few shortcomings of the electricity output data as a guide to growth:
- Changes in the structure of the economy change the relationship between growth and electricity consumption. For example, a shrinking role for manufacturing and a larger role for services – something China's economic planners have been pushing lately - reduces growth in electricity production but not necessarily growth in GDP. And even with no change in the structure of industry, many manufacturers have off-grid generators that they can switch on or off without affecting electricity production data – which only captures on-grid activity.
- China's electricity producers have their own problems. Hydropower accounts for 16% of China's electricity output. Droughts in April and May meant generators ran into difficulties. Heavy rain has now brought them whirring back to life. Neither the drought nor the flood said much about the underlying strength of demand for electricity. Changes in costs for coal – the main input into electricity generation – can also play havoc with production.
- Households account for 12% of electricity consumption and their demand is affected mainly by the weather – which determines whether central heating and air conditioners are on or off – with little relation to changes in growth.
All of these factors mean the relation between electricity production and economic growth is difficult to predict. Investors who pay too much attention to electricity as a proxy for growth can misread the signs. This was the case in the first half of 2009, when growth in electricity output stayed in negative territory till May – partly because of a slow recovery in the electricity intensive aluminum sector, but the rebound in the rest of the economy was strong. In the second half of 2011, optimism about the outlook based on June's strong electricity data may be similarly misplaced.
http://blogs.wsj.com/chinarealti ... growth/?mod=WSJBlog
July 29, 2011, 7:15 PM HKT.