The shortcomings of electricity as the Chinese indicator of choice

China Slowdown
China Slowdown

The recently-released third-quarter figures for China’s economy—GDP growth is down, but industrial production and exports are up—revived the debate about whether the China slowdown is over. But they also revive questions about how much we can rely on Chinese economic data.

China’s Vice Premier Li Keqiang infamously told US diplomats in 2007 that China’s gross domestic product (GDP) was “man-made” and “for reference only.” Local and provincial leaders, whose promotions can depend on their region’s economic performance, often fiddle the numbers to overstate growth as well as understate problems. National and regional data, and quarterly and annual data, frequently don’t match up, says Leland Miller, publisher of the China Beige Book, an independent survey of Chinese businesses. Some official data, like banks’ non-performing loans, bear almost no relation to reality, he says, and others are calculated in unusual ways: for instance, retail sales figures are based on when goods leave the factory floor, not when they are rung up in shops.

As a result, there’s a brisk industry in proxy indicators that claim to gauge what GDP is really doing. One of the most fashionable is electricity production and consumption. (Others are freight traffic, exports and imports, and even sales of digging machinery.) Power input and output can show the health of industry, the argument goes. But here are some problems with those figures too.

1. Local officials still have incentives to manipulate electricity figures, sometimes downwards and other times upwards. Chinese power company executives claimed last summer that they had been instructed not to report declines in usage, to mask a slowdown. On the other hand, before 2010 provincial leaders scrambled to meet mandatory energy reduction goals before the end of China’s 11th five-year plan, sometimes imposing power blackouts to do so. The incentives may continue. In August, China announced a target of an overall 21% reduction in energy intensity (the ratio of energy use to GDP) by 2015.

2. Electricity use mainly tracks China’s manufacturing sector, but the country is trying to build up its services sector and stimulate domestic consumption. Gordon Chang, a lawyer and author of The Coming Collapse of China, argues that electricity is the “gold standard of indicators” but also admits, “electricity will be a less reliable indicator when China develops a large services sector”—though, he says, “that is a long time from now.”

3. The latest electricity figures paint a dire picture, but a loose consensus among analysts looking at China’s better-than-expected export growth and stronger financing flows has been bullish. In the third quarter, Chinese power output grew at the lowest rate in three months, and the growth rate of power consumption hit its lowest level (paywall) in possibly two years. Again, this may just reflect the fact that manufacturing contracted for the 11th consecutive month in September (according to figures from HSBC; official statistics say it’s only the second month); other industries have proved resilient, like retail sales.

Nonetheless, the slowing growth of electricity demand could mean that GDP growth is lower than reported. Chang, a long-time China growth skeptic, says that electricity production normally outpaces GDP, and the latest data show that the Chinese economy could not have had much more than zero growth in the past quarter.

Miller says Chinese economic data say more about a narrative the government wants to construct than the state of the economy. And as long as Beijing treats the methodology of data collection as a state secret, the outside world will have a hard time figuring out what’s behind the official story.

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