A New Leading Indicator Casts Light on China's Growth Prospects

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Global Trade, Macroeconomics

No one would argue that China has become a major component of the world economy.  Just a few years ago there were many who still questioned China’s impact on the macro economic landscape arguing that although its rates of growth were high it was still only a small part of the total pie compared to the US, or Europe or Japan. Not so anymore. Not only is China the largest consumer and/or producer of many metals its impact on those markets has been as much about the disruptive impact on the old order as it has about the volumes traded. So understanding where the Chinese economy is going is of crucial importance for anyone seeking a degree of foresight into prices, currencies and trends some months down the line.

Enter the Conference Board’s Leading Economic Indicator (LEI) for China said to predict the pace and direction of economic growth in coming months. The Conference Board is a notforprofit entity and provides LEI’s for all the major economies free of charge on their website.

The China LEI is made up of six components:

  • Total Loans Issued by Financial Institutions (source: People’s Bank of China)
  • 5000 Industry Enterprises Diffusion Index: Raw Materials Supply Index (source: People’s Bank of China)
  • NBS Manufacturing PMI SubIndices: PMI Supplier Deliveries (source: National Bureau of Statistics)
  • Consumer Expectations Index (source: National Bureau of Statistics)
  • Total Floor Space Started (source: National Bureau of Statistics)
  • NBS Manufacturing PMI SubIndices: Export Orders (source: National Bureau of Statistics)

Immediately you will notice that this index relies a lot on official Chinese sources for statistical data, government controlled bodies. Some have cast doubt in the past on the accuracy of such sources but the bodies in question PBC and NBS have been reviewed numerous times and found to be largely accurate so let’s take the data sources as fair value.

The China LEI was backtracked for every month to 1986 to see how well it would have predicted past peaks and troughs and apparently it would have accurately predicted the Chinese recession in 1988-89, as well as the sharp slowdown in 2008. A review by the Economist also covers a “coincident index, which provides a gauge of current activity. This index, based on indicators from electricity generation to passenger traffic, is more timely than the official GDP figures which are released some weeks after the period. The coincident index is also more volatile than the LEI, perhaps because China’s official data tends to smooth things out. However as the following graph from the Economist shows, the coincident index as a measure of GDP fairly accurately trails the leading indicator curve, it would have been good to also have the official GDP line on this graph.

So what is the LEI saying about China’s growth going forward? As we know the economy grew by nearly 12% in the first quarter and the authorities have begun to restrain some areas of the economy notably property. The graph is suggesting growth will not continue to rise and in fact will ease back in the second and third quarters consistent with the wider global economy where Europe and Japan are both looking less healthy than they were in the first quarter. The China LEI is an interesting tool but as with all such measures it is, as its name says, an indicator and should be taken as only one of many sources of data when making estimates of future growth.

–Stuart Burns

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