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A Cooler Springtime for China

SUDDENLY, CHINA IS REACCELERATING. After the People's Republic introduced a raft of measures to cool down the economy over the last 12 months, including raising interest rates for the first time in nine years, there's evidence now that growth has sprung higher.

China recently reported that industrial output jumped 16.9% over the January to February period versus last year...

So much depends on whether the reacceleration is real. We checked in with the Economic Cycle Research Institute, which created the world's first leading index and, as it happens, unveiled the first leading index for China industrial production last week. At some 40% of Chinese GDP, industrial production is the main driver of economic growth, says Lakshman Achuthan, ECRI's managing director. Achuthan & Co. created the leading index largely by ignoring Chinese statistics -- known for their poor quality, coverage, frequency and timeliness -- and concentrating instead on more reliable statistics for China's big trading partners and neighbors. They pulled these into an index (based on how significant the trading partner was to the Middle Kingdom), and backtested the result to see how well it forecasted turns in Chinese industrial production.

Achuthan won't say what the index components are... And in backtesting, the ECRI index anticipated cyclical turns in industrial growth by eight months 100% of the time since 1996.

What's it showing now? The recent industrial production data were distorted by an increase in textile production, which surged as quotas on Chinese textiles vanished, says Achuthan. In that sense, the reason was "artificial."

In fact, growth in industrial production has moderated since last spring "from a spectacular to a merely strong pace," he continues. "It merely means we are going from a rapid to gentle boil. And it's too early to suggest that Chinese industrial production is ramping back up. The leading indicator is still easing. The more likely scenario we're going to see is that industrial production is flat in its growth rate." To get the data, you need to subscribe to ECRI's monthly International Cyclical Outlook -- which costs $10,000 a year.