New Models and Misrepresentations in China’s Consumer Economy

(Photo credit: World Economic Forum)

Suspicions about the opacity of China's economy have been on the rise.  These concerns are not only confined to the international community.  Li Keqiang, the PRC's current Premier, has spoken candidly about the arbitrary nature of China's economic statistics.  In 2010, Mr. Li said figures, especially GDP statistics, are ˜for reference only'. 

Fortunately, Li Keqiang has provided his own system of economic indicators, named the Keqiang Index  by The Economist.  This index is comprised of three main indicators of economic growth: electricity consumption, shipment of railway cargo, and bank loans.  The Keqiang index has garnered approval from banks that use this index to compile their Chinese growth figures, such as Credit Suisse and JPMorgan.  Despite this, the long-term validity of the system may suffer as China's economy grows and changes.

Electricity consumption is not an easy statistic to fake: either electricity has been used or it hasn't.  However, because the government subsidizes electricity, the statistics produced do not accurately reflect the relationship between economic growth, consumer tendencies and electricity consumption.  Moreover, subsidizing electricity may create an inflated propensity to consume, given the artificially lower prices caused by the subsidies.

The shipment of railway cargo is an excellent way to gauge economic output without relying on fabricated numbers from firms and businesses eager to overstate their output. However, the consumption and service sectors constitute a rapidly growing portion of China's economy.   Because shipment refers only to industrial or manufactured products, it provides limited data of overall, cross-sector development.   

Bank loans reflect the general output of society and the circulation of currency in the domestic economy.  This rate has been increasing steadily, topping off at 5% this year.[1]  However, China possesses an unregulated shadow-banking industry with extensive influence over bank loans and overall economic development.  Many speculate that there are trillions of RMB circulating in unregulated private investment and loan structures.  The shadow banking industry covers interbank private lending and loans, wealth management, heavy industry, construction, and many other risky asset investments.  These investments could potentially create property bubbles, artificially sustain unproductive industries and lead to massive currency fluctuations.

June 2013 began with a sharp increase in interbank lending rates to 30% across China, leading the country to the edge of a credit crisis.  Weak borrowers were assuming more and more credit with high-risk bundles of assets through this shadow economy.  These assets are largely unregulated and often are tied to China's overinflated real estate market, increasing loans and investments which might not pay off.  Credit expansion through China's shadow banking system fueled a bubble similar to the U.S.' subprime mortgage crisis in 2008.  Because the Chinese generally have a high rate of savings, many banks were flush with cash.  Injection of this liquidity helped support financial institutions and alleviate China's June credit crunch.  As the Chinese economy shifts away from saving toward a consumer based credit economy, the likelihood of a repeat event becomes even greater.

The increasing sophistication of the Chinese economy and its financial instruments seem to outpace efforts to codify and organize them.  The Keqiang Index may be an excellent tool to measure growth in China's industrial, manufacturing-based economy, but the three indicators the Keqiang Index uses may not keep up with China's rapid shift towards a credit-based consumer economy.  In short, while the Keqiang Index might be an attractive and optimistic gauge of the Chinese economy, the speed of China's economic change may quickly make it obsolete.

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Shahin Firoozmand

is a writer and researcher interested in ethnic conflict, nation-building, energy and world trade. In his free time he enjoys reading literature and philosophy as well as playing the guitar.

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