China economic forecasts: go herbal or Western?

By Wei Gu
May 6, 2009

wei_gu_debate –Wei Gu is a Reuters columnist. The opinions expressed are her own–

Which would you believe when it comes to diagnosing the health of China’s economy — the pulse-taking of the herbal doctor or the lab tests of Western medicine?

Beijing’s leaders are like the herbal doctors, using creative metrics such as power output and shipping indexes that can give a relatively accurate snapshot of manufacturing activity.

Private-sector economists, by comparison, believe in more mainstream data such as money supply and fixed asset investment even though they might not be completely useful in measuring a transitioning economy such as China.

Going by the latest economic indicators, the pulse shows the body is still listless, while the lab test is showing signs of a recovery to health. The last time this happened to China was in 2001, when the world was about to emerge from a brief recession.

It turns out that — like the debate over Western versus Eastern medicine — both methods have their pros and cons. And their relative advantages may be shifting as China itself changes.


Although very few Chinese leaders have an economics background, they still have a special insight into China’s economy. So, when Premier Wen Jiabao said that a key economic gauge is power consumption, people took notice.

Power output traditionally has shown a strong correlation with business activity as the Chinese economy is one of the most energy dependent in the world.

Its beauty is that it is not distorted by inventories, is difficult to manipulate and is available almost real-time. Chinese banks routinely check the utility bills of their clients to make sure that factories are still busy.

Amid the current economic turbulence, the timeliness of such data has been crucial to Chinese leaders who want to be able to make speedy decisions.

China’s power output in April declined 3.6 percent from a year earlier, marking a continued fall in the country’s consumption of electricity, the official Xinhua news agency said.

The report defied investors’ belief that China’s massive economic stimulus package has led to a sharp rebound for manufacturers as indicated by the bullish reading on the purchasing managers’ index.

But with China moving away from heavy energy-consuming industries and toward a more energy-efficient economy — energy consumption growth trailed GDP growth by half in the first quarter — it may be that power consumption has become a less accurate barometer of manufacturing health.


When analyzing foreign demand, Chinese officials favor the Baltic Exchange Dry Index, which measures global shipping activity of commodities such as iron ore, soybeans and coal.

The index tumbled to levels unseen in 20 years at the end of 2008, when China’s imports sank as de-stocking ran its course.

This year, however, the index offers a less telling read on China’s demand for raw materials because the State Reserves Board has embarked on a commodities buying binge. Thus commodity imports might just be sitting in the reserves instead of going to factories.

In more developed economies, services, rather than manufacturing, account for the biggest chunk of GDP, which might explain why Western economists tend to focus on money supply rather than power consumption and shipping gauges.

After China’s money supply surged a record 25.5 percent in March as banks ramped up lending, foreign investment banks’ knee-jerk response was to upgrade their forecasts for China GDP.

But while money supply might hold the key to economic activity in Western countries, in China now, a lot of those loans are policy-driven rather than a result of market forces. Much of that has been recycled into banks, as indicated by a 29 percent jump in time deposits this March.

Western economic theories have not been very successful in analyzing Japan, which managed to defy the Phillips curve by having both low inflation and a tight job market for years. They might be equally less helpful in analyzing the Chinese economy, which is dominated by the government and its agencies.

Despite the problems, it is not for nothing that leading indicators, which include things like money supply and the stock market, are called “leading”, and coincident data, which includes things like power consumption, are called such.

Leading indicators were about a year too early to call the economic recovery that started around 2002, while the coincident data has performed largely in tandem with the real economy.

Currently, the uptick on the coincident index is hesitant while the bounce in the leading index is quite determined.

Perhaps this is a sign that an economic recovery — which has caught the imagination of economists and investors but has yet to convince Chinese leaders — is on the way, but its actual start might be later than what the market believes.

For a related chart, click here.

— At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund —


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The Story of developed economies over the last 30 years has been a confusion of imaginary wealth creation – asset price inflation driven by an increase in debt / money supply – with a growth in the real economy.

While Japan has had it’s own flirt with asset price inflation it has a large real economy (manufacturing) as does China. In the real world energy use is a good proxy for real activity. Therefore energy usage is a good proxy for real activity.

But because we in the West have been living in the imaginary world where we have deluded ourselves that our inflated money supply equals wealth, money supply rather than energy (real growth) is the measure that reflects our delusionary economic growth

Posted by Alan McCrindle | Report as abusive

What China must do is stimulate domestic demand. Many people living in the huge rural areas of China don’t even have a fridge? On the other hand China wants to keep it’s producing costs low so it can’t increase it’s salaries to much.

Next thing could be to reform health care so that people don’t have to save money and worry about that.In the countryside 80% percent are uninsured! The cap between the urban and rural areas is to big. Health care can be a very profitable business so China has to focus on that more.

China should invest more in tangible goods like gold and other commodities which they luckily are doing right now to a certain degree.

I think it’s also very important for China to invest in new technologies to get the pollution out of their chimneys also to prevent future cost as a result of this pollution. Solar Panels definitely have the future if Governments and Oil and Car conglomerates don’t stand in the way anymore like they do now. China is gonna produce electric cars but that’s not enough. Also the energy grid has to be adapted if the electric car is to be successful.

Posted by Youri Carma | Report as abusive

“China should invest more in tangible goods like gold and other commodities which they luckily are doing right now to a certain degree.”

Well now, could and would, China use US debt instruments to invest in these ‘more tangible goods like gold…’

One way to sink the USS Ship of Debt! And it’s environmentally safe given that the debt is highly toxic and makes swine flu appear more as a mild cold.

Posted by P.D. O’Tyrrell | Report as abusive


China is world’s largest gold producer. China has increased it’s gold by domestic purchases at local mines and refining scrap metal. They didn’t want to influence the International gold market. So, they didn’t have to use their dollar supply for that.

China now holds 1,054 tonnes of gold and has become the fifth largest official holder of gold as a part of China’s plan for more diversification. China recently made 70 billion Yuan monetary deal with Argentina. Malaysia, Indonesia, South-Korea and White Russia earlier cut a “Money line” deal of 260 billion Yuan as part of that plan.

China doesn’t want a dollar collapse cause it would hurt them as well having almost $2,000 billion as foreign reserve but they understand the reality of the situation in which the dollar is losing it’s appeal. How to get rid of the dollar whiteout a fast dollar collapse?

Well maybe steadily but gradually decoupling from the dollar is the answer. After all the dollar also has been gradually in decline for the last couple of years whiteout causing any panic reactions.

Posted by Youri Carma | Report as abusive

First, from the author: “Western economic theories have not been very successful in analyzing Japan, which managed to defy the Phillips curve by having both low inflation and a tight job market for years.”. Economic theory has advanced a lot since the 70s and I don’t think you can criticise all western economic theory based on the shortcomings of a single outdated concept.

I don’t really advocate those views China should be buying tangible assets that don’t help develop the country. I think they are doing some of the right things such as building new cities and improving old ones with the required infrastructure to provide future growth. The government’s job is to build a framework in which an economy can grow, not to take a view on whether it’s people need fridges, solar panels or large piles of gold sitting in a warehouse. The people can judge this much better themselves on a microeconomic level. All the government needs to do is grease the wheels (and in some places construct them) then it is doing a good job.

Posted by David | Report as abusive


Well you made a very sophisticated point there David, tnx!

But let me make a unsophisticated one, if $2 trill blows up in your face it does affect the framework though. Not that they couldn’t stand that blow but nevertheless.

Posted by Youri Carma | Report as abusive

Correction: $2 trillion are the totale Chinese foreign exchange reserves like said before.$1.9537 trillion by the end of March to be precise.

Analysts believe China holds up to 70 percent of its foreign reserves in U.S. dollar-denominated assets, including Treasury securities.

So, 70% x $1.9537= $1.3676 say $1.4 trillion.

Posted by Youri Carma | Report as abusive


$2 trillion has not blown up in anyones face and is unlikely too. The U.S. national debt, is absolutley large, but relatively medium as a percentage of GDP, and puny relative to national wealth. This fact escapes many people excited by the big numbers shouted about during the economic crises. Layered upon that is plenty of wishfull illwill towards the U.S. for reasons that have little to do with economics.

This goes to Alan’s assertion of phantom assets. The U.S. capital stock, that is the physicall and other investments held by household and businesses, approach 65 trillion dollars. Against that some 10-15 trillion in debt is outstanding. That maybe absolutley huge, but is not large relative to the economy underpinning it.

So, it is important to take a sober and critical eye to the debt feuled disaster that has befallen the western economies, but these economies have built their wealth and strength over more than a century and have met their fare shae of disasters before, witness the destruction of WWII, they will recover, as they are brimming with educated, entrepreneural people encased within dynmic economic models.

It is the people that make china a dynamo, and the latest in the great stories of economic transformations of nations, to all our benefit. It is the people that also make the U.S. the dynamic economic system that it is. And the dollar has been a key anchor to China’s economic vitality. Transitions to a basket currency, will come slowly and eventually, but collapse is a term for those goldbugs selling gold. Not for sober discussion.

Posted by nyongesa | Report as abusive

Sorry to be unsophisticated, but a simple measure of China’s export economy is to look around the de-stocked warehouses and note the absence of Made in China products that people in the UK are not buying this year, but were buying early last year. No one, but no one, will convince me about any measure that suggests China is magically selling exports that no one is buying in the US or UK. Short term stimulus will be just that unless the world show gets back on the road. Not that it should, if we want to save the planet. Growth is not good, growth is tyrannical.

Posted by Paul Freeman | Report as abusive

Although “decoupling” with the U.S. will eventually happen, it is still some ways off, and because most “analysts” are overestimating the strength in the Chinese (and Indian) economies, and because the Shanghai stock market is not cheap, this is surely not the time to be committing new capital to China. The widely-expected 8% growth in 2009 is an absurdity; 1-4% is more likely. When India reports on Friday, it will be seen to be approaching 0%, at least on a per capita basis. The only cheap market is Russia, and maybe HK or Singapore.

Posted by Paul | Report as abusive

The east-west medicine analogy was a nice opening for this column. But for all the econo-babble that followed, about asking the patient how they feel. Do you believe numbers presented by the Chinese government? “Chinese officials favor the Baltic Exchange Dry Index ….”, oh yeah, that’s really what tells the story. ‘Coincident data’, try finding some coincident data on streets and where the Chinese people are sleeping after being locked-out of their jobs and dormitories.

Posted by John Kelly | Report as abusive

China derives over 25% of its GDP through export. It faces three huge challenges: (A) managing its huge excess capacity through a global slump; (B) stimulating internal consumption and services to replace exports as the engine of GDP growth; and (C) managing its monetary and fiscal policies through global instability of financial markets. The Chinese government cannot be faulted for trying to gloss over these challenges through rosy numbers. It needs to compete for investors money. Let us say, it has less so of a challenge in throwing window-dressing numbers to market its economy, than the stress-tests orchestrated by the US and UK.

Posted by Amateur Econ | Report as abusive

China should use its reserves to buy US tech companies that produce future technologies that currently are super cheap and don’t have a huge market yet like green energy. This would prepare them for peak oil, the coming carbon credit market, and it would reinject the US economy with dollars, which would spur growth and spare the US gov’t and the fed from deteriorating their fanancial position trying to do the same.

They could also probably get a good deal buying or building US infrastructure with their huge dollar surplus, like ports, highways and windmills, and solar farms. They could buy up US farmland or mines etc. All they have to do to maintain the value of their surplus is invest them in the means of production of the real economy, while things are cheap. Forget treasuries. The US has things China actually needs.

Posted by Q | Report as abusive

[…] ways in which they can turn their domestic demand outward. For example, Chinese factories are now looking into the world trend of “Going Green”, meaning the days of energy consuming industry are on their way out and an energy efficient economy […]

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