A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.



A New Chinese Leading Index

The red-hot pace of growth in China's factory sector which has moderated since the end of last year will continue to cool, according to a new gauge released on Tuesday.

The Economic Cycle Research Institute, an independent forecasting group, launched a monthly leading index of Chinese industrial production. The group said the index slipped to 139.8 in January from 140.3 in December 2004.

The cyclical growth rate, which anticipates directional changes in industrial production, is 0.6 percent compared with 1.5 percent in December.
"The forecast has been a cyclical downturn in the growth rate from a fierce boil to a gentle boil, and the leading index is saying that the throttling back is still in place," said Lakshman Achuthan, managing director of ECRI.

China's booming economy, which grew 9.5 percent last year, has garnered global attention because of the country's strong demand for oil and commodities to drive its industrial sector.

In October 2004, Chinese officials pledged to guard against inflation by raising interest rates for the first time in nearly a decade and implementing stricter controls on business loans to slow the pace of growth.

Data released earlier Tuesday showed China's industrial output grew faster than expected in the first two months of the year, at 16.9 percent compared with the same period a year ago.

Achuthan, however, warned that the data may have reflected a one-time boost from increased textile production in the wake of an expiration of WTO quotas on Chinese exports. ECRI's leading index is also showing the slowdown is not over.

"The slowdown will stick around for at least a quarter or two," he said.

In a statement, ECRI said that its leading index relies on data from China's trade partners and neighboring economies. China's official economic statistics are sometimes unreliable, partly due to quality and timeliness, ECRI said.

"Even if you were going to manipulate data, you are more likely to manipulate the level ... The cyclical approach does not get affected by that as much because we are looking for the inflection points," Achuthan said.

The index will be [privately] released near the end of each month.