That is not the opinion of a provocateur, but the reported views of the country’s own prime minister. During a dinner with U.S. Ambassador Clark Randt in 2007, Li Keqiang—then party secretary of Liaoning Province and a rising star in the Communist Party—said that official gross domestic product data was less reliable than a mix of electricity consumption, rail freight volumes. and credit growth. Those three numbers were harder to tamper with to arrive at a politically favorable outcome, he said, according to a U.S. embassy memo released by Wikileaks in 2010.
That assessment has proved to be a pretty good guide to China’s growth for the next 14 years, with an index weighing 20% for rail freight and 40% for electricity and loans tracking the official GDP data quite closely. However, that’s a disturbing result at the moment – because two of the key indicators are under critical pressure at exactly the same time.
There are clear reasons why credit growth is heading for a difficult point. The crisis that left China evergrande The group struggling to fund its $300 billion commitments may very well be resolved without triggering a systemic crisis. If it does, the fact that the company is having so much trouble accessing new credit from state-owned banks is itself an indication of how the frantic pace of lending is beginning to wreak havoc on Beijing.
A Lehman-style shock could lead to an actual contraction of credit within the system, such as the 4.6% annual drop in US lending in the wake of that 2008 crisis. Even a reset to more normal levels of growth would be troubling for an economy where lending has grown at least 12% per year for decades, double the rate seen in the US.
No other major emerging economy has debt-to-GDP levels comparable to China’s, and most highly leveraged developed countries had been deleveraging for years before Covid-19 hit, while China has accelerated borrowing.
The situation with energy is strangely similar. Power rationing has spread across many of China’s economic powerhouse provinces as local governments risk missing the emission intensity reduction targets of their economies, with smelters in Yunnan, textile mills in Zhejiang and soybean crushers in Tianjin all shutting down to prevent power cuts to non-industrial users.
For years, electricity consumption in China has grown hardly slower than the economy itself. That model is in trouble as President Xi Jinping’s ambitions to peak emissions by 2030 begin to translate into policy goals. If China were to grow electricity demand at 5% per year from current levels without burning more coal, it would have to build close to 100 gigawatts of solar and 50 gigawatts of wind each year — but the growth rate that being pursued is closer to half that level.
So county officials face incompatible mandates: keep electricity supplies flowing to boost the economy, but keep carbon emissions in check, even if high-level plans for the energy sector don’t promise enough carbon-free power plants will shut down. an abundance of coal-fired capacity to keep the grid running. Last week’s record prices for Chinese coal futures are the sign of a system struggling to cope with conflicting demands.
Rail freight, the latter part of the Li Keqiang Index, has outperformed – but if you look at it as a measure of overall activity within the economy, there are troubling signs. China’s high-speed rail network, barely conceived when Li met the US ambassador, was designed in part to free up space on the conventional tracks so that freight could be moved that way rather than by road. Unsurprisingly, rail has held up quite well – but freight volumes as a whole have looked weak since Covid-19 hit and appear to be stuck at the level of around 4.3 billion tons per month that they’re about three years into. met years ago.
That’s worrying. What is striking about the memo that inspired the Li Keqiang Index is how little domestic policy concerns have changed in 14 years, with much of the discussion focusing on the problems of corruption and how to balance growth and income inequality. However, the economic model Li described, where officials will stop at nothing to meet GDP targets, is heading for bankruptcy.
China’s growth has been fueled by credit and carbon for decades, and Beijing finally seems to be getting serious about changing that. Whether its economy can withstand such a drastic intervention remains to be seen.