A Better Way to Track China's Economy

It may be summer in China, but the factory lines aren't heating up. Just released PMI figures suggest the world's biggest export engine is in a holding pattern.

 

While better than bad news, it won't comfort those looking for early confirmation of a Chinese economic rebound in the second half of 2012.

 

As looser economic policies from Beijing take effect, the market had been hoping for a bounce. But that's not a given according to JP Morgan. 

 

[Haibin Zhu, JP Morgan Chief China Economist]:

"If you talk about year over year growth, I think it's still too early to say the second quarter is a bottom. Actually in our forecast, we're looking at the second half still have about 7.6% growth, so it'll be a flat recovery in the second half."

 

But mainstream metrics like PMI and GDP might not actually be the best gauge of economic strength anyway. Growth figures could be subject to meddling from anxious regional officials, as incoming Premier Li Keqiang hinted in a leaked US diplomatic cable.

 

Some other readings that rarely command headlines are worth considering. Power consumption, for one, is seen as a reliable gauge of industrial production. If growth in demand for electricity remains soft, or worse, contracts, you can bet an economic boom is not on the horizon. 

 

Cement may be another good indicator, according to Bank of America. If stimulus-led infrastructure spending is on the rise, you’ll see it first when the cement starts moving. 

 

But official policy has so far favored monetary measures. The People's Bank of China is seen cutting interest rates by a further 25 basis points in third quarter, while the amount big banks must keep in reserves will fall by another 100 basis points, according to a Reuters poll.              

 

[Jian Chang, Barclays Capital China Economist]:

"We do no think government will role out a big fiscal stimulus measures because they want to avoid the mistake made in the 2008 and 9. Because overall economy is still absorbing the consequences of the property bubble, local government debt, excess capacity in quite a few industries, and also inefficient investment."              

 

While Premier Wen Jiabao made it clear in comments released this week that containing property prices remains a major priority, he also opened the door to increased government spending in the second half.              

 

It may turn out that China's lesser known indicators are the best ones to watch, when it comes to understanding both the health of the economy, and official efforts to prop it up.