Is China’s electricity data worth any of your precious attention?

The slowing growth in China’s electricity output and consumption has been drawing a lot of attention the past few months. Production in June growth was flat, year-on-year, prompting many questions as to how Q2 GDP managed to grow at 7.6 per cent.

China’s electricity production and consumption data are watched because they are thought to give a more accurate picture of growth than GDP.

Although, we wonder whether there are any good reasons to rely on China’s electricity data at all. Not only are there two diverging measures of electricity – output and consumption – but there are credible motives for local authorities to massage the figures both upwards and downwards, making it near impossible to hazard an educated guess at what the underlying picture might be.

First, let’s just look at output.

Here’s the New York Times story from late last month, which looked at claims that power plant managers were inflating their output figures:

But local and provincial government officials have forced plant managers not to report to Beijing the full extent of the slowdown, power sector executives said.

…

“The government officials don’t want to see the negative,” so they tell power managers to report usage declines as zero change, said a chief executive in the power sector.

Okay. Let’s assume there’s something to this, while we return to look at consumption.

It’s this measure, rather than output that is (apparently) considered by China’s authorities to be an indicator of real economic activity.

Widely-reported remarks attributed to Li Kequiang in a US diplomatic cable published by Wikileaks refers to consumption, not output, as one of Li’s three relatively accurate measures of economic activity. The other two were rail cargo and bank lending. (GDP, meanwhile, is “for reference only”, according to the cable.)

Electricity production and electricity consumption don’t always move in perfect sync; far from it. In April for example, year-on-year production growth was just 0.7 per cent, while consumption growth was 3.7 per cent. Some BAML analysts argued at the time that the consumption figure was generally more credible as the output number excludes small power plants owned by steel and cement companies.

So how has consumption been tracking?

Again, the rate of consumption change diverged from the corresponding output number; while the latter was flat in June, consumption reportedly grew at 4 per cent. This 21st Century story on June consumption is not available in English, but Chinascope Financial have summarised the key points thus:

According to local energy regulators, the country’s total electric power consumption in June grew by about 4%, lower than 5% recorded in May.
Although power consumption in Hubei province, Jiangxi province and Shanghai posted positive growth from May’s negative growth, it did not suggest that China’s power consumption has turned better. The power consumption growth in the provinces of Zhejiang, Jilin, Henan and Yunnan all recorded negative growths in June.
Analysts said that the bleak power demand was due to China’s economic downturn.

Yes, you read right: power consumption is falling in some provinces, just like what happened in the recession-hit west a few years ago. And apparently some provinces were brave enough to report it as such.

The flipside: A reason for electricity reports being pushed downward

China’s bureau of statistics was questioned about the discrepancy between the power and GDP data last week. In response Sheng Laiyun, a bureau spokesman, made the following point:

“Everywhere in China is extremely focused on cutting energy use and cutting emissions, and focused on technological innovation,” he said. “So there was great progress in the first half of the year in cutting energy consumption. The amount of energy consumed per unit of GDP decreased.”

That may be so; there were reports suggesting that blackouts took place in some provinces as local authorities rushed to meet targets for reducing energy-per-GDP-unit by the end of the 11th five-year plan in December 2010. Alastair Thornton at IHS Global Insight wrote in February that the November/December 2011 electricity consumption growth figures probably suffered a baseline distortion as a result. It’s not clear to what degree the energy intensity targets of the current, 12th five-year plan are also affecting the data.

So, we have two different sets of data — output and consumption — and possible reasons for manipulating them both to be misleadingly skewed in either direction: either manipulated upwards to meet growth targets; or pushed downwards to meet energy intensity targets.

An incredibly simplistic conclusion might be that the output data is more likely to be manipulated upwards (for growth) whereas the consumption data is more likely to be manipulated downwards (for energy intensity).

But really, we don’t know. (If you know, do tell us.)

Anyway. Moving on. Standard Chartered’s China economist Stephen Green and team pointed out last week that the electricity output-to-GDP relationship has gone rogue before: in both 1998 and late 2008/early 2009, electricity production growth went negative, but industrial production (a large and energy-intensive component of GDP) did not:

Whether that says more about GDP data or electricity data is a question we’ll leave for now. But Green and colleagues Priya Narain Balchandani and Serene Lim attempt to come up with an alternative to electricity as an indicator, and make a case for gasoline/petrol and diesel/gasoil as being better indicators than electricity — at least, among the energy data sets.  They say this appears to support the movements of the manufacturing and the services PMIs, which in turn are suggesting that consumption is faring better than the investment part of the economy. More on that in the usual place.

Meanwhile this story from the state-controlled media makes us even more dubious about how much heed to pay to electricity data:

BEIJING – China’s electricity use, a key indicator of industrial activity, is expected to grow 7 percent this year to reach 5.1 trillion kilowatt-hours as the country’s pro-growth policies gradually take effect, an official forecast on Monday.

Forecasting electricity use — how hard can that be?

Related links:
China figures prompt doubts over accuracy - FT
A contrarian view of China’s power data – FT Alphaville