From Gavekal’s Chen Long and Andrew Batson via FTAlphaville:
We think the Li Keqiang Index has in fact been severely abused. The index is actually correlated only with the performance of heavy industry, and its relationship with the rest of economy and particularly consumer spending is quite weak. This is no surprise when we consider its components. As we have shown in previous research, electricity growth is basically a proxy for the volatile metals industry, rather than for the economy as a whole. And rail freight is actually closely related, since the main cargo of railways in China is coal, which is the main fuel burned by power plants to generate electricity.
We should remember that Li Keqiang used these indicators under very specific circumstances. In the Liaoning province of 2007, the economy was indeed largely driven by heavy industry, so it was very reasonable for him to look at these data. However, Liaoning was and is more reliant on heavy industry than the rest of the country. And the structure of the national economy has changed dramatically since 2007. Services now account for a larger share of the economy than industry, and within industry, consumer- facing sectors are now larger than traditional heavy industry. We do not find it all compelling to argue that a measure of this declining sector of the economy can provide a clear picture of the whole.
