Li Keqiang IndexIn this Macronote I thought I’d just give users the means to construct their own Li Keqiang index (LKI).
Don’t know what it is? (find our here) – Well, (courtesy of Wikileaks) legend has it that at a diplomatic dinner with the US ambassador, when Li was a humble regional party boss of Liaoning, the Prime Minister to be alluded to GDP-data being unreliable; “man-made”. Instead, Li suggested it was better to track a couple of less known activity indicators, such as cargo volumes on railways, electricity consumption and the amount of new loans, when tracking the Chinese economy. Of course, this couldn’t be left unexplored, which is why many started looking into the data more deeply. Despite the very vague description offered by Li, both the Economist and Bloomberg have managed to get some type of monopoly on what exactly constitutes the Li Keqiang Index and what the weights1 are. Nonetheless, the semi-official LKIs provided by these fine institutions looks very much like this:
Now, I posit that this approach misses the gist of Li’s line of thought, and that a more pragmatic approach is probably to look at some general direction of these variables instead of an overly rigid formalization. Fortunately, the PCA-analysis offers an attractive alternative, filtering out the common trend of the data. In addition, and continuing with a more holistic approach, as Prime Minister it seems as if Li might want to add an “excavator index” to his portfolio of indicators as well. In the below graph I have added a couple of versions, which I feel are more true to form:1How do you decide the weights? How do we know that it was these exact series Li referred to? Is there no problem in replacing energy consumption for production) etc. etc.
The first component explains about 50% of the total variance for most of the specifications I tried, but here I have limited the data set to those normally discussed and also added the “excavator index” Li obviously has taken a liking to.
The main finding is that using energy consumption (labelled ‘Original (consumption)’) seems to add some more cyclicality to the Li Keqiang Index, a feature further underlined when adding the “excavator index” (labelled ‘Expanded’). Also, the expanded version also seems to demonstrate a more pronounced downtrend in activity over the past year, aligning better to current views on the Chinese economy.
That’s all for today, have a splendid weekend!
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