Over the past nine years, the “ Li Keqiang Index ” has become an unofficial method of measuring China’s economic growth since the now famous 2007 exchange between Premier Li Keqiang, then the Communist Party secretary of Liaoning Province, and U.S. Ambassador Clark Randt.

Within the exchange, 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.”

Since Li’s admission, Wall Street analysts have constructed their own models of Chinese economic growth by combining elements of the Li Keqiang index with other economic statistics, and all of these measures suggest that Chinese economic growth has been much lower than its official rate especially in 2015 when the true growth figure is believed to be less than 5% or even below 3% compared to the official rate of 6.8%.

However, the one drawback of these models is that they are all based on assumptions about and models of the Chinese economy that are difficult to express, let alone test. Furthermore, the index’s individual components may fail to recognize the structural changes underway in the Chinese economy (a decline in rail use, for example, may reflect the economy’s shift away from industrial production towards services and not a general economic slowdown.)

Hunter Clark, Maxim Pinkovskiy, and Xavier Sala-i-Martin of Liberty Street Economics of the Federal Reserve Bank of New York appear to have come up with a solution to this problem, which may produce a more accurate reading of growth.

LSE_Is Chinese Growth Overstated?

In an article published yesterday, the trio argues that satellite recorded data on the brightness of nighttime lights across Chinese provinces may be the perfect independent gauge of Chinese economic growth.

Chinese Economic Growth Is Understated 

It has been well established that growth in nighttime light intensity is a good proxy for economic growth. The article points out by “gauging how well changes in different economic variables correlate to fluctuations in nighttime light intensity, we can see which series are more reliable as growth indicators.” Unlike other measures of economic performance, the task of measuring the relationship between light intensity and true unobserved economic output, is complicated by weather and atmospheric disturbances, which inconvenience the data gathering process but are not as troubling as the systematic reporting errors by people and businesses, mistaken decisions by statistical agencies or in some cases, outright manipulation when traditional data is gathered.

Using a regression of growth in nighttime lights across Chinese provinces and over time on the growth rates of the various statistical series used to calculate the Li Keqiang index and the various indices devised by Wall Street analysts, the study’s authors find a strong relationship between nighttime light use and economic growth. The correlation between official GDP growth and nighttime lights growth is documented in the scatter plot below.

chinese economic growth

­­­By combining both nighttime lights growth and Li Keqiang index estimated economic growth, the study finds that the components of the Li index should not be assigned equal weighting as is typically supposed. Analysis indicates bank loan growth should be given six to eight times more weight than rail freight growth.

The implications of this simple adjustment are profound. By giving equal weight to all index constituents, the study finds that since 2012 estimates of Chinese GDP growth have never been appreciably lower and have in many years been higher than the GDP growth rate reported in official statistics. The chart below presents the path of official Chinese GDP growth alongside the modified Li index.

chinese economic growth nighttime lights