China's economy is growing even faster than official figures claim, according to a new study that uses satellite observations of nighttime lighting to measure the country's expanding prosperity.
It's a finding that will surprise many Sino-cynics and it should come as good news to anyone who invests in mining companies or emerging markets.
To be sure, estimating Chinese growth remains more an art than a science. Still, the research by economists Hunter Clark and Maxim Pinkovskiy of the Federal Reserve Bank of New York and Xavier Sala-i-Martin of Columbia University offers a fresh and intriguing way to gauge the Asian giant's progress.
China is the world's second-largest economy and has been its strongest, most reliable engine in recent years. In 2016, it accounted for roughly 39 per cent of all global growth, according to Stephen Roach of Yale University.
Keeping tabs on this dynamo is vital for everyone from macroeconomists to mining companies. But the problem is that no one trusts many of the numbers produced by Beijing's bureaucrats.
The official data on gross domestic product seem too smooth and perfectly in line with optimistic government projections to be believed. In 2007, Chinese Premier Li Keqiang told a U.S. diplomat that even he ignored the authorized numbers. Instead, Mr. Li monitored the economy by averaging the growth rates of electricity production, rail freight and bank loans.
In keeping with that roll-your-own approach, a crowd of Western consulting firms and security analysts now build their own models of Chinese performance based loosely on the Li Keqiang approach. Over the past year and a half, many of those unofficial estimates have been hinting at reason for worry, with several suggesting Chinese GDP growth in the last quarter of 2015 was only about half the official rate of 6.8 per cent. But it's hard to test those economic models for accuracy.
This is where satellite observations of nighttime lighting come in. The amount of illumination at night in a city or a region offers a handy and reliable way to measure how a local economy is doing. Growing prosperity goes hand in hand with more brightly lit homes, streets, stores and restaurants.
In their study, the economists compared changes in the amount of nighttime lighting to various other Chinese economic data to find out which indicators were most closely associated with GDP growth. They discovered, for instance, that growth in bank loans was a much better indicator of economic expansion than rail-freight growth. They then recalibrated the original Li Keqiang approach to reflect that result.
"Looking back at the prediction for the end of 2015, we can reject the dire growth-collapse scenarios that were suggested by some of the Wall Street indices at the time," the researchers write.
In fact, their findings align with the notion that official Chinese figures are consistently underestimating the pace of GDP growth, perhaps because bureaucrats have been slow to recognize the expanding heft of the service sector.
"Our estimate for Chinese growth shows an appreciable acceleration in 2016, even as the official growth rate remained virtually unchanged," the economists say.
They caution that their approach says nothing about whether growth will continue at this rapid clip. Among other concerns, the growing importance of bank loans suggests that any decline in lending could signal turmoil ahead, especially in the country's notoriously frothy real estate market.
But all that being said, the researchers' analysis indicates there is little reason for worry right now – a finding backed up by the most recent official numbers, which show that Chinese GDP expanded at a 6.9-per-cent-a-year clip in the first quarter of this year.
This should be particularly good news for shareholders in the mining sector. The Asian nation consumes roughly half the global production of most major industrial metals and a healthy pace of Chinese expansion is good news for raw materials producers of all sorts.
The optimistic conclusion should also encourage emerging-markets investors in general. For now anyway, China appears to still be bulling ahead.
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Ian McGugan