China appears to be moving into a higher gear as the year end approaches, judging from a recent surge in two of the three indicators that Premier Li Keqiang once famously said he would follow personally to gauge the actual speed of growth in the world’s second largest economy.
The indicators are electricity consumption and railway cargo which, along with bank lending, The Economist uses to compile the so-called “Li Keqiang Index” to shed light on China’s growth trajectory, on top of the official GDP reports.
Most notably, October witnessed a sharp pickup in rail freight volume as well as a gain in overall power consumption growth fueled by a significant rebound in industrial power usage.
That should be a good omen for China’s 4Q GDP growth, for which economists are predominantly predicting a mild slowdown to 6.6% after expanding 6.7% for the three previous consecutive quarters.
Electricity consumption saw 7.0% growth during October from a year ago, substantially more than the first half’s 2.7% increase, according to the National Bureau of Statistics.
Electricity usage in the industrial sector had been dragging down overall power figures in recent months, before finally producing a sharp recovery in October, increasing 4.9% from a year earlier. The driver was the pick up in heavy industries output as commodities rallied, after having slumped to 1.4% growth earlier in September.
Meanwhile, household power consumption growth slowed in October, dropping to 12.2% from September’s 24.9% year-on-year figure, as falling temperatures reduced demand for air conditioning.
Power used by the service sector also dipped in October. Having peaked in February this year, year-on-year growth last month was 13.5%.
October’s rail freight traffic growth came in at 11.2%, marking its fastest year-on-year gain since June 2010. The strong recovery came only three months after shaking off a 34-month run of negative numbers, starting in 2014.
There is clearly a strong correlation between these two physical indicators and China’s quarterly GDP figure as shown in the following chart. Greater volatility in the power and freight gauges are due to the fact that they are both on-the-ground indicators, collected on a monthly basis.
For the 20-year chart, a power production data series was used as opposed to consumption figures, due to the lack of historical data on the latter.
Interestingly, these power and railway indicators have been on a steep upward climb, with both exceeding the current level of GDP growth in the October. On previous occasions, such a marked pickup in power and railway traffic have been followed by an upturn in GDP growth.