OMG Q2 GDP WTF

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It's that time of the year again: GDP for the second quarter is out, and boy does it look sunny. Quoth The Wall Street Journal's Aaron Back:

The issue, as many an economist will acknowledge, is that GDP is among the most sensitive and thus distorted economic indicators in the entirety the regrettably fuzzy field of China economics. Given the existence of official GDP goals, the figures published by the National Bureau of Statistics are more akin to a public gauge of the leadership's confidence in its own performance than anything that will help observers actually get a handle on how mainland China's economy is doing. Yet every quarter and year, markets the world over tremble in anticipation before the latest data goes public.

Alternatives have been suggested, among them the famous Li Keqiang Index, composed of railway cargo volume, electricity consumption and bank loans. But that was based off of a stopgap measure Li used in 2007 while he was head of Liaoning province, a heavy industry heavyweight in China's Northeast. It's hardly a reasonable proxy for the country's economy as a whole.

Worse, one of its main components, rail freight volume, isn't even the most important measure of broader domestic freight. That would be highway freight, which outstrips it handily in terms of absolute volume:

Attention is likely still paid to railway freight because it it was included in the current premier's old jury-rigged suite of economic indicators and, ostensibly, on the assumption that it can serve as an imperfect proxy which correlates roughly to domestic freight as a whole--and thus the economy at large. Unfortunately, upon comparing changes in the volume of highway and rail freight, that doesn't seem to be the case:

Beyond the annual Spring Festival interruption, correlation between the two has been tenuous and at times downright nonexistent over the last year or so.

We've written before about the myriad issues that plague China's highway freight data. But given its clear importance to domestic freight as a whole and the economic implications thereof - at least until the transition to a services-oriented economy is complete - it's time to admit the hard truth: We have far less of a handle on China's economy than we'd like to believe.

Relying on rail freight or (heaven forbid) GDP as if they were accurate proxies for the economy at large may provide a bit of comfort every month or quarter, but that misses the point of an economic indicator. If it's understanding you seek, search elsewhere. 


Author: Hudson Lockett (@KangHexin)