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The Economic Indicators That Matter to China’s Next Premier

Forget gross domestic product, it doesn't tell the whole story about a country's economy. Focus instead on these economic indicators: electricity consumption, rail cargo, and bank loans.

Feng Li

This is apparently what Li Keqiang, expected to take over as premier in China' leadership transition, said at a meeting with the U.S. ambassador in 2007, according to a Wikileaks cable.

The Chinese GDP figure is "man-made" and for "reference only," he was quoted as saying.

While it's not clear whether Li stands by these views, economists say it is fair to treat the Chinese GDP with some caution.

The latest data show China's economy grew 7.4 percent in third quarter from a year earlier, putting the economy on course for its slowest annual expansion in 13 years at a rate of about 7.5 percent.

"It would not surprise us if GDP growth is overstated — the economy is likely far weaker than it appears," said Alistair Thornton, China economist with IHS Global Insight in Beijing.

That's a view that Patrick Chovanec, a professor of business at Tsinghua University in Beijing, shares. "The data is a more prominent concern in China because the numbers don't seem to square. I have trouble reconciling a 7.5 percent GDP number with what I see in other data," he said.

So, what do the indicators that China's premier-in-waiting appears to track, say about the state of the world's second largest economy?

(Read More: How Wen Jiabao Undermined the Party's Legitimacy)

In third quarter of the year, power use, rail cargo, and bank loans all took a particularly negative turn.

Rail cargo volumes, which were already growing in the low single-digits earlier this year, started falling in June and continued to slide in the third quarter of the year. The latest data showed rail freight fell 9.2 percent year-on-year in August, the worst decline since the height of the global financial crisis in 2008.

(Read More: China Raises Rail Spending Plan Again to Support Economy)

"If China says GDP growth is around 7.5 percent, but rail freight is falling by 7 to 8 percent, you can't reconcile that," said Chovanec.

Power use and disbursement of bank loans have also shown a steep drop. Growth in power use, for instance, has slowed to 2.9 percent in September from the month earlier after expanding at an average monthly rate of almost 12 percent in 2011.

Thornton says power consumption is a key gauge of the health of Chinese industry because industrial demand makes up 70 percent of total power consumption.

Key Banking Sector

Growth in lending has also declined alongside the economy. An annual growth rate in China this year of 7.5 percent, the government's target, would mark a slowdown from last year's 9.2 percent and an average rate of 10 percent for the past three decades.

Beijing has tried to help boost lending and support the sluggish economy by cutting interest rates twice this year and reducing bank reserve requirements (RRR) three times since November, but has refrained from taking aggressive action since the last RRR cut in July.

This has some analysts worried and they say the new leadership, expected to be ushered in during the Communist Party's Congress starting on November 8, will need to do more to encourage bank lending.

(Read More: Why China's Bank Earnings Could Surprise Investors)

"In 2012 the economy seems to have slowed to the point that companies need less working capital finance," Jim Antos, a banking analyst with Mizuho Securities in Hong Kong told CNBC. "The new government needs to tackle China's slowing economy and the credit component is the grease that keeps the wheels of industry turning."

Total new loans reached 6.72 trillion yuan ($107.4 billion) in the first nine months of 2012, up 18 percent from the same period last year, according to the People's Bank of China. This is however down from the 30 percent average growth in new loans in the past decade.

Antos is also concerned about credit quality, citing a more than 20 percent surge in past due loans — defined as repayments that are 30 to 60 days behind schedule — in the first half of the year.

(Read More: China Banks' Bad Loans Steady, Capital Adequacy Up)

This is a "very significant change, something we have not seen at any point in the past 5-8 years in China," he added.

Banks themselves may be getting worried about the quality of their loan books and have been progressively building their defenses against those loans going sour. In the third quarter, China's big four banks increased provisions against bad debt for the third consecutive quarter, by a range of 20 to 48 percentage points.

Bad loans could come back to haunt the banking system and the new leadership, unless something is done about it, Antos said.

"The concern of many investors is that the government may not be willing to come to grips with weaker credit quality, but instead allow banks to continue to roll over loans that should probably be restructured," he said.

China's economy may be more fragile than the GDP numbers suggest and if Li is paying attention to this, as the Wikileaks cable suggests, the next Chinese premier may well be a reason to expect stronger action from Beijing in boosting growth.

"Recalibration will not be enough for the new leadership. Urgent reforms are needed," Thornton said. "The longer the delay, though, the higher the costs. It has been true under every administration since (former leader) Deng Xiaoping, but it really is make or break for the economy under Xi and Li."

—By CNBC's Jean Chua