PROXIES for growth once favored by China’s premier are bouncing back amid a stabilization in smokestack industries.
Electricity use, rail-cargo volume and bank loans—combined in a weighted average known as the Bloomberg Intelligence “Li Keqiang Index”—are collectively at the highest level in three years.
While the strength shows fiscal and monetary stimulus is putting a floor under expansion, it’s also evidence that stabilization is reviving industries, such as steel and property, that don’t really fit plans to shift to more reliance on services and consumption. Another wrinkle is that some crucial new economy drivers are looking slightly less robust.
“The smokestacks are billowing again as the old economy comes roaring back,” said Frederic Neumann, cohead of Asian economic research at HSBC Holdings Plc. in Hong Kong. “That can only be temporary, being fueled by an ultimately unsustainable build-up of debt. The key to lasting development is the new economy, the gizmos and services of future consumption, but that’s seemingly on hold for now as the old economy gobbles up credit.”
Reports on Thursday will give a fresh look at how factories and services fared in November. The official manufacturing purchasing managers index (PMI) and a private reading from Caixin Media and Markit Economics both edged down to 51, according to economists surveyed by Bloomberg as of late Tuesday, near the prior month’s two-year high of 51.2 for both. Numbers above 50 indicate improving conditions. Services rose to 54 in October.
Rebalancing is a key goal for China’s policy-makers, who are seeking more sustainable growth centered on consumers, instead of factories and other old economic engines. Services accounted for more than half of output last year for the first time.
However, some metrics show the new economy is cooling. The Bloomberg Intelligence New China Real Activity Index fell to 8.34 in September, the lowest in its 10-year history. The gauge is a weighted average of consumption of medicine, vehicle exports, clean energy electricity generation, computer production and output by private companies.
“It should put to rest the thought of a smooth rebalancing from manufacturing to services,” said Derek Scissors, Washington-based chief economist at China Beige Book International. “Successful rebalancing will face repeated bumps.”
Another sign of life in the old economy: Production of cement, electricity, steel and glass accelerated in October from the previous month, statistics bureau data show.
Fresh highs for the Li Index point to China’s “old economy clanking into gear,” Bloomberg Intelligence economists Tom Orlik and Fielding Chen wrote in a recent report. “The good news: It confirms the story of robust growth told by the official data,” they said. “The bad news: It shows the old, energy-intensive industrial sector roaring back to life.”
The Li gauge rose 10.58 percent in October from a year earlier after rallying from 1.16 percent in September 2015, the lowest reading stretching back more than a decade. Loans had the best gain with a 13.1-percent rise from a year earlier, though that’s up from a recent 10-year low. Rail cargo has risen 10.7 percent. Power output is up 8 percent.