Since the global financial crisis in 2008, China's economy has achieved great growth. On a purchasing-power-parity basis, China has surpassed the United States to become the world's largest economy. The Chinese economy is also far larger than the second largest economies of India, Japan and Germany. As a result, investors and policymakers are increasingly focusing on growth in China in addition to U.S. growth when determining the direction of global markets. The Fed now regularly incorporates China's development into its policy-making agenda, mentioning China more times than any other country at its FOMC meetings. This inevitably raises the question of what kind of growth do we want to track and forecast - using officially reported GDP, or looking for other raw growth measures?
This case is a long-distance turning belt conveyor tailored by Zhongrui Heavy Industry for the transportation of iron ore by Huaxia Jianlong Group
Huaxia Jianlong Group·Hebei Luanping
Transport capacity: 2600t/h, bandwidth 1400mm, transport distance: 2300m
Turning angle 45°, radius of curvature: 500m
Many people are trying to find a measure that reflects China's economic growth. It is understood that China also tends to focus on indicators such as rail freight volume, electricity consumption and bank loans, rather than GDP.
In addition, there are other methods such as using nominal GDP (which can exhibit greater volatility than real GDP), using broader data on China's growth, using other countries' export data to China, and even using satellite data as alternatives data.
There are three alternative measures. The first is nominal GDP. Unlike real GDP, nominal GDP can exhibit greater volatility. This means that adjustments to the price deflator may be responsible for the unusually flat performance of real GDP. The second is the Fed's China Cyclical Activity Tracker (C-CAT). This recently developed index covers 8 indicators (Fernald et al., 2019), each of which is published monthly, including consumer forecast index, electricity generation, Chinese export stars, construction area, rail freight, retail sales , industrial production and investment in fixed assets. The third is China's import data derived from other countries' export data. We have high confidence in the data of other countries, so we can calculate the export volume of these countries to Mainland China and Hong Kong. The data will reflect Chinese imports and be used to gauge Chinese demand.
While all three indicators are good, to capture the development cycle of China's economy a step further and in a more timely manner, SGX believes it can use commodity and financial market prices rather than monthly or quarterly data. Given that China is one of the world's largest importers of commodities, changes in commodity prices are an obvious candidate for reflecting Chinese demand.
In terms of the composition of Chinese imports, the largest share is integrated circuits, followed by oil, iron ore and copper. While oil and copper prices have been widely watched and often used to track China's economic growth, iron ore prices have not been well studied. That's partly due to poor volumes as of 2008 due to its now-defunct benchmark pricing system, iron ore swaps that began in 2009, and partly because old habits are harder to change. The good news is that iron ore futures have become more liquid and more reflective of changes in demand than before.
Using the generic 2-month SGX Iron Ore 62% Iron Fines contract as the preferred iron ore price indicator, when comparing the annual change in iron ore prices with three measures of China's economic growth It can be found that there is a strong correlation between them. From 209 to 2018, this relationship appears particularly close. However, iron ore prices rose in the first half of last year despite slowing economic growth in China last year. Part of the reason could be that China is producing ahead of schedule or building stocks, requiring iron ore to offset a downturn caused by U.S. tariffs on Chinese trade.
However, it could also suggest that iron ore may be able to measure growth that is not captured by the three main measures. China's stock market is thought to be on the mend, with China's A50 index up 40% in the first half of 2019. Other economic time series also rose in the first half of 2019, notably China's non-manufacturing and consumer expectations.
Aside from iron ore, the commodity markets most closely linked to China are oil, copper and the Baltic Dry Index. China is the largest importer of oil and copper, so the two are highly correlated with China's economic growth; while the Baltic dry bulk shipping can reflect China's dominance in trade and shipping. The other two candidate market prices are China's 10-year government bond yield and China's stock market. Again, SGX looks at the annual changes for both separately and uses SGX futures prices where applicable.
Overall, all of these indicators appear to correlate to varying degrees with China's economic growth indicators. The comparison between these metrics and the C-Cat index is shown in the chart below. Bond yields, oil and copper appear to capture most of the ups and downs well, while Chinese stocks and Baltic dry bulk have less stable correlations with the C-Cat index.
To clarify the relationship between these market prices and economic growth, correlation analysis can be performed. Using the Fed's C-CAT index to measure China's economic growth for comparison, focusing on the results of three time periods that capture different cycles shows that the correlation between the stock market and economic growth is very low and often negative, so it is unlikely to become a Hengxing A reliable indicator of China's economic growth. All other indicators, including iron ore, showed strong correlations with growth. With the exception of the stock market, all correlations are also statistically significant.
Evaluate the leading attributes of market prices by comparing data lagging one or two quarters to see if they predict China's economic growth three or six months later. This shows that iron ore, copper and oil have continued to be highly correlated since at least 2012 if they lag by a quarter. Iron ore has the highest and most stable correlation if it lags by two quarters. This suggests that iron ore may have important forward-looking capabilities that other markets cannot capture.
The C-CAT index is calculated quarterly, but monthly data can also be viewed. Using Dianstar data shows that there is a positive correlation between most market prices. The Chinese stock market remains an exception. Oil showed the strongest correlation, but iron ore and copper also had strong correlations.
Its look-ahead property allows the correlation to be calculated by lagging the market price by 6 months. The results show that most market prices still have a positive correlation, but the magnitude is decreasing. The only exception is iron ore, which has shown a stronger correlation since 2012. This confirms that there are some leading indicators of iron ore characteristics.
Looking at the annual changes in SGX iron ore prices, they have been trading sideways at low levels over the past few months. However, from the changes in the 3-month period that can capture short-term growth dynamics, it can be seen that there is a clear
rise. This suggests that growth momentum has been improving, at least since April, against the backdrop of global Covid-19 lockdowns.
If you combine the five best growth indicators of iron ore, Treasury yields, copper, oil and Baltic dry bulk, you get a China tracker. The trend of rising prices is similar to that of China's economic growth. Part of the reason for this climb has to do with the sharp rise in oil prices. That said, the level of this short-term tracking indicator has risen, and there may be room for a pullback.
If iron ore prices are compared to this overall growth tracker (the 3-month variation version), it can be seen that iron ore prices are rising along with this overall growth tracker. Importantly, the iron ore market did not drop as much as the overall tracker in the early days of the Covid-19 pandemic, suggesting a more optimistic view of growth, which has since proven correct.
Iron ore prices have been rising since July, while China's overall tracking indicator has been sideways. That could mean limited gains from iron ore or that the iron ore market is more optimistic about China's economic growth than that overall tracker. In any case, using iron ore as one of the indicators will broaden our understanding of the direction of China's growth, and combining iron ore with some other China-centric indicators can provide a real-time growth tracker.