China : Is “Li Keqiang” Index Out of Date?

724

By Salim Wang and Dr. Mevlut Katik : –

Analysis of economic situations generally involves some standard theoretical framework application as well as observation perspective gathered from and based on practice. Sometimes, the latter is able to more intuitively and rapidly reflect current economic trend and operation status. During his tenure as Provincial Committee Secretary in Liaoning from 2004 to 2007, Li Keqiang, China’s current Premier, in addition to employing some common main economic indexes and analytical methods used for the analysis of economic situations, laid emphasis on economic indicators closely related to economic growth, such as industrial power consumption, railway freight volume and banks’ long and medium-term loan balance, and used them to judge the current economic operation status based on his work experience. In 2010, the Economist, a British magazine, named his analytical framework “Li Keqiang Index”. The Index has been immediately recognized by several international research institutions, stating that such index is closely related to main growth trends, well matches historical data and is able to objectively reflect China’s economic operational status of the Chinese economy from a different perspective.

With changes in China’s development stage, quantitative relationship between “Li Keqiang Index” and economic growth will undergo some new changes, but only the said quantitative relationship would undergo changes representationally, but economic observation and analysis function would remain unchanged in “nature” since it still has strong practical value.

I. “Li Keqiang” Index” highly related to economic growth rate

Observation and analysis of economic situations in accordance with such indexes as industrial power consumption volume, railway freight volume and medium and long-term loan balance have a theoretical basis in economics and complies with practical conditions of China’s economic development.

For over 30 years following ‘Reform and Opening-up’, Chinese economy has rapidly developed, and industrialization has accelerated. In such process, proportion of added value from the primary sector (farming, forestry and fishing) is small and gradually declines.

The tertiary sector (service) was underdeveloped for a long time. The secondary sector(manufacturing etc), especially the manufacturing, grows rapidly and become a leading force for the Chinese economic growth. For instance, the manufacturing’s contribution rate to economic growth was 50.9% between 1990 and 2010, 15.1% higher than that of the tertiary sector. On average, the manufacturing contributed 5.2% to economic growth, 1.5% higher than that of the tertiary sector. Industrial development generates large demand for energy resources and consumes a large volume of power. Industrial power consumption accounts for 70% of total power

consumption by the whole society. Therefore, industrial power consumption volume is highly related to economic growth.

Natural resource products of China, such as coal and mineral, are mainly produced in the central and western areas and processed and used in more developed eastern areas. Spatial layout of the industry determines transportation of such resources and products through railways. Therefore, railway freight volume is closely related to economic growth.

Economic growth is dependent on capital investment. Given the specific circumstance in China under which resorting to indirect financing is a long-standing practice and a main artery in the world of finance, medium and long-term loan is an important index affecting investments as well as economic growth and has larger reference value for the sound judgment of economic trend.

Based on the interpretation of data available, it is safe to say “Li Keqiang” index is well matched with the signs and level of economic growth. The so-called “matching” mainly refers to basic consistency of trend in data change in highly related indicators, and does not involve synchronous and equidistant change in data. Through comparison of indicators contained in “Li Keqiang Index” with GDP and industrial growth rate from 2003 to the first quarter of 2015, we can easily see that such indicators change in the same direction, that operation trends of such indicators are basically consistent and data are basically matched and that fluctuation of three indicators contained in “Li Keqiang Index” is larger than that of GDP and industrial growth rate. Between 2013 and the first quarter of 2015, average of GDP growth rate is 9.8% and fluctuation range1 is 7.2%; while average industrial growth rate is 13.3% and fluctuation range is 12.1%. Average growth rate of industrial power consumption volume, railway freight volume and medium and long-term loan balance is 9.5%, 4.2% and 20.7% respectively and corresponding fluctuation range reaches 16.6%, 20.4% and 34.5% respectively again (see the attached Table).

II. In recent years, relationship between “Li Keqiang Index” and economic growth rate has been undergoing changes

With Chinese economy stepping into a new stage of transformation and development, economic growth rate slows down and economic structure, development mode and operation quality undergo active changes. Matching relationship between economic growth and growth rate of industrial power consumption volume and railway freight volume also undergoes some changes, which is mainly attributed to adjustment and optimization of economic structure.

In recent years, under government guidance and market reaction to it, service industry has been developing rapidly. With continuous rise in proportion of added value of service industry in GDP component, the industry’s role in driving economic growth will be weakened as will quantitative relationship between industrial power consumption volume and economic growth. Changes in

industrial structure, energy structure and cargo transportation structure result in continuous decrease in railway freight demand, and, therefore, quantitative relationship between railway freight volume and economic growth will undergo adjustment.

First, given the ongoing changes in China’s industrial structure, increase in proportion of added value of service industry results in decrease in demand for power and railway freight. In recent years, service industry has been developing consistently and rapidly. In 2012, 2013 and 2014, growth rate of the service sector was 0.4%, 0.7% and 1.1% higher than that of secondary sector. In the first quarter of 2015, this rate has even soared to 1.5%.

In 2013, proportion of added value of the service industry in GDP was 46.9%, exceeding, for the first time, that of the secondary sector. That rate continuously increased to 48.2% in 2014 and to 51.6% in the first quarter of 2015. This indicates that China’s industrial structure has been undergoing significant changes and that the service industry has become the biggest industry of the economy as a whole, and consequently industry’s leading role in economic growth is weakened. Furthermore, the developing service industry’s demand for power and railway freight is greatly lower than that of the industry.

Second, recent proportion of added value from six major high energy-consuming industries in the whole industry is less than 30%, but their power consumption volume is over 63%. In other words, effect on industrial power consumption volume imposed by growth rate of six major high energy-consuming industries is greatly much larger than their impact on the added value of the industry.

With acceleration in internal innovation pace of the industry, growth rate of hi-tech industries was continuously higher than that of six major high energy-consuming industries, 1.7% and 4.8% higher in 2013 and 2014 respectively. In the first quarter of this year, the rate went up to 5.1%. Proportion of added value of hi-tech industries in total industrial added value soared to 11% in the first quarter of 2015 from 8.9% in 2011, a 2.1% increase, while proportion of added value of six major high energy-consuming industries decreased by 2.2% during the same period. At present, production capacity of high energy-consuming industries is severely excessive ,which will surely cause a greater decrease in industrial power consumption volume.

Meanwhile, in the case of continued pressure caused by economic downturn and possible decline of producer price index (PPI), purchase of raw materials would decrease, forcing inventories of coal and steel to increase and railway freight volume to drop.

Thirdly, analysing the changing energy structure, continuous decrease in proportion of coal reduces the demand for railway freight. In recent years, China has accelerated restructuring the energy field, gradually making a shift to clean energies. Accelerated adjustment of power industry structure and continuous decline in proportion of thermal power restrains the demand for coal.  Energy statistics clearly show that proportion of raw coal in the energy picture gradually decreased year after year and went down from 77,8% in 2011 to 73.2% in 2014, a 4.6% decrease. In terms of energy consumption structure, proportion of use of coal decreased from 70.2% in 2011 to 66.0% in 2014, a decrease of 3.8%. Meanwhile, proportion of clean energy consumption  increased from 13% in 2011 to 16.9% in 2014, an increase of 3.9%.

The fourth point that derives from transportation structure is that other means of transportation are likely to replace railway freight. With continuous increase in domestic expressways and substantial improvements in sea and air transportation capacity will make transportation mediums increasingly diversified and decentralized. Given the economic downturn pressure, enterprises will become more sensitive to transportation costs and tend to replace railway transportation with sea transportation at lower costs.

Meanwhile, special layout of the industry undergoes changes. Several coal producing areas in the central and western regions of China have switched to power plants and transformed transmission of coal into transmission of power, which solved the problem of “transmission of coal from the west to the east” to a large extent. For the purpose of reducing logistics and labor cost, several enterprises constructed plants and organized production in resource spots. Such factors also cause decrease in demand for railway freight. Since 2012, proportion of railway freight volume in the whole freight business dropped to less than 10%, a mere 9.2 % in the first quarter of 2015. Although proportion of railway freight declined, general freight volume in the whole society still grew at a rate of 7.1% in 2014 and 4.5% in the first quarter of 2015 respectively.

The fifth point to take into account, based on the import structure is, that increase in import of resource products reduces the demand for railway freight. In railway freight, proportion of coal, mineral, steel and grain makes up for about 70%. In recent years, price of bulk commodities in the world declined and China’s import volumes increased. In 2014, China imported 930,000,000 tons of iron ores, an increase of 13.8% compared with that of 2013. In addition, import quantities of steel, grain and crude oil increased by 2.5%, 33.8% and 9.5% respectively. Proportion of coals imported to the eastern coastal area by sea has continuously increased. Import substitution effect lowers enterprises’ reliance on domestic transportation and reduces the demand for railway transportation.

III. “Li Keqiang Index” is still an important economic index, realistically reflecting economic operation trend.

In recent years, although quantitative relationship between several indicators contained in “Li Keqiang Index” and economic growth rate underwent some changes, the logic is consistent and data are well matched. In terms of relationship between industrial power consumption volume and economic growth, economic growth rate decreased from 7.7% in 2013 to 7.4% in 2014, a decrease of 0.3%. Meanwhile, industrial power consumption volume also decreased from 7.0% to 3.7%, a decrease of 3.3%. In the first quarter of 2015, economic growth rate was 7.0%, a decrease of 0.4% year-on-year, while growth rate of industrial power consumption volume is -0.7%, a decrease of 5.9% on year-on-year basis. Direction and trend of change in data is basically corresponding to one another .

In terms of relationship between railway freight volume and economic growth, economic growth rate in 2014 was 0.3% lower than that of 2013, and railway freight volume decreased from 1.6% in 2013 to -3.9% in 2014, a decrease of 5.5%. Direction and trend of change in those two areas are basically consistent.

Similarly, growth rate in medium and long-term loan balance is over 10%, which is well matched with the economic growth rate.

Just like examination of a person’s physical condition through measurement of blood pressure, blood pressure fluctuations in people at different ages and effects of fluctuation on a given individual’s life and health are not exactly the same. Therefore, different measurement standards shall be adopted, but change of such standards does not affect effectiveness of such index.

Although quantitative relationship between “Li Keqiang Index” and economic growth rate experienced new changes in recent years, they still are related to each other to same extent. The function of using “Li Keqiang Index” to observe and analyse economic trend remains unchanged and it still has important reference value for analysing and judging economic operation. Change in such quantitative relationship complies with international experience and general rules of economic development and reflects active progress of Chinese economy in terms of quality improvement, efficiency enhancement and upgrading. With further development of economy, quantitative relationship will probably undergo further changes. This tells us that we shall fully and accurately understand “Li Keqiang Index” in the light of the development achieved. Especially at the time of analysing China as a complicated and huge economy during the period of transformation and development.

Attached Table    Changing state of Economic Growth and Related Indicators Contained in “Li Keqiang Index”

Year  GDP Growth Rate (%) Industrial Growth Rate (%) Industrial Power Consumption Volume Growth Rate (%) Railway Freight Volume Growth Rate (%) Medium and Long-term Loan Growth Rate (%)

Attached Table    Changing state of Economic Growth and Related Indicators Contained in “Li Keqiang Index”

Year  GDP Growth Rate (%) Industrial Growth Rate (%) Industrial Power Consumption Volume Growth Rate (%) Railway Freight Volume Growth Rate (%) Medium and Long-term Loan Growth Rate (%)

IMG_20150601_205821

Fluctuation

range  7.2 12.1 16.6 20.4 34.5

Source: China Statistical Yearbook in relevant years, Excerpt of Chinese Statistics of 2014, the People’s Bank of China and China Electricity Council websites

__________________________________

1. Fluctuation range refers to difference between maximum value and minimum value of growth rate

2.Mr.Salim Wang  senior journalist of Economic Daily.

SHARE