New Economic Signposts Needed as China Targets Consumer-led Growth

Beijing | Source: Shutterstock

BEIJING, China — Forget electricity production and iron ore imports. China watchers today pore over box office receipts or furniture sales to judge where the country is heading as Beijing plots a course toward consumption-led growth.

Incidentally, both gauges are holding up reasonably well, economists say, backing the official line that the world’s second-largest economy is slowing, but not as dramatically as feared by pessimists.

Economists have long suspected that official figures are about as useful as astrology, even if they have a wide range of data to choose from covering the likes of manufacturing, exports, credit and investment.

But in gauging consumption and services, they even lack the stars as a guide, with reliable data rarer than Giant Pandas.

“Some figures, any figures, on expenditures would be really welcome as the markets are going to be watching that more and more closely as China heads for a consumer economy,” said Alvin Pontoh, Asia-Pacific strategist at TD Securities in Singapore.

“Everybody grapples with the data. The only comfort is that we’re all in the same boat.”

Everything from salt consumption to Audi sales are used to get a handle on the economy, in which the service sector is already the biggest employer and accounts for about 45 percent of activity.

Yet China’s long reliance on investment and manufacturing to drive growth is reflected in how it measures its gross domestic product, essentially counting everything supplied to the economy while most developed nations measure everything consumed. This production bias has led to a dearth of data on spending.

Take, for instance, the official measure of retail sales. This counts a sale from when the good is shipped to a retailer, rather than when it is actually sold. Goods could be piling up on store shelves but they still count as sales.

There is also little coverage of spending on a range of services, including rents. China’s statistics bureau itself has argued that spending on rents is underestimated and, thus, so is household consumption nationally.

This leads outside analysts to seek ever more exotic ways to gauge economic trends.

TEA LEAVES

Wang Jin, an economist at Guotai Junan Securities in Shanghai says he looks at car sales, furniture sales that are linked to the property market, or box office sales as proxies for consumer spending.

“Car sales and property-related consumption, services spending such as movie box office are holding up well.”

China’s movie box office sales jumped 36 percent in the first half of 2013 from the same period last year while furniture sales rose 21 percent, according to government data.

Both outpaced the 12.7 percent rise in retail sales and the 7.6 percent expansion in the economy, as did sales of Audi and BMW vehicles, seen as a proxy for demand for luxury goods.

At the other end of the market, He Yifeng, economist at Hongyuan Securities in Beijing, looks at the level of salt consumption in provinces to see the movement of migrant workers. Consumption per capita is relatively steady, so it allows tracking of population shifts within the country.

The conclusion? Fewer migrant workers are flocking to coastal provinces such as Guangdong, reflecting rising costs and cooling demand for exported goods manufactured in coastal cities.

A sudden slowdown in Chinese sales from French luxury group LVMH prompted concerns this year, though Beijing’s crackdown on gift giving and extravagant living may have lessened their predictive power.

Lu Zhengwei, chief economist at Industrial Bank in Shanghai, noted from his own experience that high-end restaurants were hit hard by President Xi Jinping’s frugality campaign, though there were signs of recovery lately.

Another taster of demand is sales of mobile phones. Research group Gartner estimates handset sales rose 7.5 percent in the first quarter of the year, roughly the same pace as the official economic growth rate, and accounted for a quarter of all phones sold globally.

Reuters Breakingviews combines many of these alternative series into a measure titled “The Chinese Tea Leaf Index”.

The latest June reading, though well below January levels, was up for the second month running and above a low hit in July 2012.

LESS POWERFUL

Chinese Premier Li Keqiang has cited electricity consumption as one of his preferred economic measures, along with rail cargo volumes and bank lending.

The Economist magazine duly combined those three into the eponymously titled Keqiang Index and found it a lot more volatile than the official version of GDP.

Yet electricity use may be losing its predictive power. The service sector tends to be less energy hungry than heavy industry, lessening the relevance of the data as might Beijing’s attempts to close down the most inefficient and polluting factories.

The British bank HSBC and Markit publish a survey that covers services such as transport and communication, finance, computing and hotels and restaurants. But it has nothing like the pulling power of HSBC’s manufacturing survey, which regularly moves financial markets.

Neither makes assessing the labour market any easier, a crucial darkspot since Beijing is assumed to be very sensitive about unemployment levels.

The official jobless rate covers registered urban unemployment and misses out more than 160 million migrant workers, the most cyclical part of the labour market, says UBS economist Tao Wang.

She looks at data on new jobs in urban areas, which have grown steadily this year, apparently due to relatively solid growth in services sectors.

Analysts also use the quarterly migrant worker survey and the ratio of job openings to applicants at job centres in around 100 Chinese cities.

Still, analysts admit to flying blind most of the time.

“It’s hard to say which indicators are more reliable,” says Industrial Bank’s Lu. “Nobody knows which Chinese indicators will herald a turning point in the economy.”