from Liberty Street Economics

— this post authored by Hunter Clark, Maxim Pinkovskiy, and Xavier Sala-i-Martin

For analysts of the Chinese economy, questions about the accuracy of the country’s official GDP data are a frequent source of angst, leading many to seek guidance from alternative indicators. These nonofficial gauges often suggest Beijing’s growth figures are exaggerated, but that conclusion is not supported by our analysis, which draws upon satellite measurements of the intensity of China’s nighttime light emissions – a good proxy for GDP growth that is presumably not subject to whatever measurement errors may affect the country’s official economic statistics.

Doubts about the Data

In the eyes of many observers, China’s economy seemed to be entering a tailspin in 2015, with a stock market crash in June followed by a surprise currency devaluation in August. And yet, the official GDP data showed growth slowing hardly at all, ticking down to 6.8 percent at the end of the year from 7.2 percent in 2014. The financial press pounced on these “questionable” statistics, often citing a now-famous 2007 exchange between Premier Li Keqiang, then the Communist Party secretary of Liaoning Province, and U.S. Ambassador Clark Randt. Li admitted that he preferred to assess the state of Liaoning’s economy by averaging the growth rates of electricity production, rail freight, and bank loans, adding that official statistics were “man-made” and “for reference only.”

Li’s metric – since dubbed the “Li Keqiang index” – has declined for four of the past six years, recording an especially precipitous drop in 2015. Such signals have prompted many observers to believe the Chinese economy is weaker than official statistics portray it to be (notwithstanding the fact that the index rose over the course of 2016).

Skeptical of the official numbers, many Wall Street analysts have constructed their own models of Chinese economic growth, combining elements of the Li Keqiang index with statistics on retail sales, construction, and other types of activity. Many of these measures suggested that Chinese economic growth in the last quarter of 2015 was indeed much lower than the official rate of 6.8 percent – with the “true” figure often claimed to be less than 5 percent, or even below 3 percent.

Imperfect Alternatives

These nonofficial indexes are all based on assumptions about and models of the Chinese economy that are difficult to express, let alone test. Each model implies a particular set of weightings for a particular set of economic indicators, and changing these parameters would have profound implications. As the chart below shows, the components of the Li Keqiang index – the growth rates of electricity production, rail freight, and bank loans – have followed separate trajectories over the past twelve years. Placing greater weight on any of these inputs would produce a much different stream of GDP growth estimates.