Sizing up China using 'New Li Keqiang index'

In a country where conventional indexes to measure the health of the economy are often met with scepticism, a more reliable way of doing so has emerged - and that method is being refined further.

But the "New Li Keqiang index", named after the Premier who was responsible for the original version, is not without its doubters.

Some experts say that accurately tracking its indicators could pose challenges, and that there is a risk of not capturing the full picture of the economy if it is used.

The new index, which will have a greater focus on employment, personal income and environmental improvement, is an upgrade of the "Li Keqiang Index" that first surfaced in 2010.

The story of that index goes like this: Over a private dinner with then United States ambassador Clark Randt in 2007, Mr Li, then party boss of north-eastern Liaoning province, reportedly shared his own method for assessing the health of the world's No. 2 economy.

Gross domestic product (GDP) figures are largely "man-made" and unreliable, he said, but electricity consumption, railway freight and bank loans are better proxies of growth.

His comments, revealed in a leaked diplomatic cable in 2010, sent economists into a tizzy as banks and brokerage houses created their own versions of such an index to better gauge the US$10 trillion (S$14 trillion) economy's strength amid scepticism over the reliability of official growth figures.

But last week, China's State Council, the country's Cabinet, suggested in an online article that it was time for a "new Li Keqiang index".

The new measure should focus on employment, personal income and environmental improvement to better reflect Beijing's "new normal" economy and its increasing focus on innovation and consumption, said the article, which cited reports in the China Business News, a Chinese business daily, and British magazine The Economist.

"Despite moderation in growth, the Chinese economy is moving in the desired direction of stronger domestic demand and innovation," Mr Li had written in a Nov 2 article in The Economist.

" One by-product is a fall in the relevance of indicators such as power consumption, rail-cargo volume and new bank credit in gauging economic performance," he wrote.

Experts say the original "Li Keqiang index" is more applicable to China's industrial economy, while the new indicators reflect better the growing role of services and consumption in the economy.

Peterson Institute scholar Nicholas Lardy earlier this year said the services sector has grown continuously faster than GDP, with its share of the economy now exceeding that of manufacturing.

"Expanding demand for services such as healthcare, education... and travel generates little or no demand for industrial goods, electric power or freight transport. The demand for passenger transport, in contrast to freight, is soaring as domestic tourism booms," he said.

Economist Chen Long, of the Beijing-based research firm Gavekal Dragonomics, said that with China's economy running on dual speed - a weak industrial sector versus a services sector that is "doing okay" - the new index could also have a political purpose.

"It is possible the new index is part of Beijing's propaganda to get more focus on positive data in the light of industrials' poor showing," he said.

"But you can't say it's not accurate as the whole point of economic growth is to improve quality of life and the indicators of the new index do track that," Dr Chen added.

But accurately quantifying the measures that make up the "New Li Keqiang index", such as environmental improvement, could pose a challenge, experts add.

Also, the urban unemployment rate as an indicator may not be useful in tracking the real economy; it has remained largely stable at between 4 per cent and 4.3 per cent annually over the past decade.

Economists say that while new indicators are helpful, the original Li Keqiang index cannot be overlooked as China's shift away from old economic drivers, like manufacturing, is not yet complete and is likely to be a long-term process.

Moody's Analytics economist Alaistair Chan said it is not possible to track any economy, especially one as big and fast-changing as China's, with just one index.

He said: "The government is probably aware of this, and the announcement of the focus on areas such as employment and the environment is a way to signal to the public that it is aware of its concerns, it is working to resolve them, and it is confident enough of progress that it allows those areas to be benchmarked as well."

This article was first published on December 5, 2015.
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