New gauge in need to weigh out China’s new economic growth

Recently an article issued in Foreign Affairs pointed out that anyone who cares about China’s economy should really focus on the country’s effort to shift from industrial to service-based activity: the service sector currently accounts for almost 50 percent of GDP. So old measures focusing on industrial sectors may not make sense today and can easily mislead; what actually matters when observing China is that structural changes are under way.

At the moment markets still use measures and indicators based on the traditional economy to track performance, like closely monitoring data on exports, consumption of raw materials and industrial production, or scrutinizing whether Chinese authorities have adopted expansionary monetary policies. These indicators often make dire and totally wrong predictions of an imminent economic crash.

“Li Keqiang Index” which combines data about credit growth, energy consumption, and freight transport volumes is outdated as the all indicators that are more sensitive to shocks in the industrial and commodity sectors than to changes in aggregate economic activity.

A closer look at China’s service sector reveals a more reassuring picture of the country’s economic performance. From January to November of last year, China registered 3.9 million new companies, mostly concentrated in tourism, health care, sports, and education. In addition, wages, growing at more than ten percent annually, have empowered Chinese households in an unprecedented way, giving rise to more consumption. As the McKinsey Global Institute noted in a report, “You just don’t get a consumer growth story this good anywhere else.”

New “Li Keqiang Index”,including indicators for the service industry, mainly focuses on three variables: employment, residents’ income, and environmental improvement.

Under new standards, data could be analyzed so as to show that although a hard landing by China’s industrial sector might result in enormous costs for the rest of the world.,Even if the industrial sector drops to 3.5 percent annual growth, assuming that the services industry expands at around 8.8 percent (which is in line with long-term projections), the Chinese economy would still grow at around six percent. It is certainly not a crash.

Analysts should use unorthodox indicators that are not part of a standard macroeconomic toolbox. Building new models, gathering new indicators, and creatively combining knowledge from apparently unrelated fields is necessary if observers are to cope with the new economy.

Meanwhile, in order to preventing panic and financial turmoil, China’s authorities should also cooperate with international organizations like the International Monetary Fund, the World Bank, and the Asian Development Bank by providing more transparent and complete statistics.

Excerpts from Foreign Affairs, organized and rewritten by Wu Zheyu