The Li Keqiang Index Is Dead, Long Live the New Li Keqiang Index

Peter Cai

Economics, Asia

Economists need a new index to reflect the changing reality in China.

Paul Krugman says all economic data is best viewed as a peculiarly boring genre of science fiction, but Chinese data is even more fictional than most. The Nobel laureate is not the first, and certainly will not be the last, to point out the unreliability of Chinese data.

In fact, when the National Bureau of Statistics releases its data it’s usually greeted with derision and disbelief. Imaginative economists, fund managers and commentators have developed a variety of alternative measures of gauging the Chinese economy. Ironically, the most famous and used alternative measure is named after China's Premier, Li Keqiang. 

The story starts something like this. Li, when he was the party secretary of Liaoning province, told the American ambassador to China at the time that he didn't trust the official economic data. Instead, he looked to figures such as electricity consumption, railway freight and bank loans as more reliable indicators. We know this thanks to Wikileaks. 

The Economist created an index in honor of him and the measure has gained popularity over the time. However, as the country's services sector contributes two thirds of economic growth, it begs the question whether the index is still relevant. The most high-profile critic is none other than the premier himself. He argues, in the Economist no less, that the index is less relevant nowadays than before. 

“One by-product is a fall in the relevance of indicators such as power consumption, railway cargo volume and new bank credit in gauging economic performance,” he says. Li, who has a doctorate in economics, points out consumption is now responsible for 60 percent of growth in China. 

He is right in pointing out that China's economy is going through a period of transition. Some old engines are sputtering and new ones are firing up. One of the best performers is consumer spending, which has been growing in double digits this year.

When Li confessed to the American ambassador about his lack of confidence in economic data, the services industry accounted for 41.89 percent of GDP. At the end of 2015, the services sector accounted for more than 50 percent of GDP. Over the same period, the manufacturing sector dropped to 41 percent of GDP.