Li Keqiang index: Is it defunct and can we replace it?

One of the most important alternative ways to track the China's economy, the Li Keqiang index, is falling from favor, with China-watchers in ever more need of insight into the country's real economy.

Just in case you're unfamiliar with the Li Keqiang index (LKQ to its friends): It is named after the current Chinese Premier and entered investors' lexicon after a leaked memo from the U.S. Ambassador to China hit WikiLeaks in 2010.


China's premier Li Keqiang.
Chris Ratcliffe | Bloomberg | Getty Images
China's premier Li Keqiang.

The memo followed the ambassador's dinner with Li, who was then head of Liaoning province in the North East of China. Li reportedly stated that China's GDP figures were unreliable and that he instead focused on three different sets of data to measure his province's success: Electricity consumption, bank lending and rail cargo volume.

The memo's appearance on WikiLeaks then led to The Economist magazine and other China-watchers employing the index themselves, as part of ongoing attempts to devise what was going on in China behind the official statistics.

This has become even more important given the panic about China's economic prospects that caused August's stock market rout, in which markets around the world experienced more volatility than at any point since the credit crisis.

Yet, with its focus on credit and heavy industry, the index has been discredited in recent years. The index is now "quite useless" according to Arthur Kroeber, founding partner and head of research at Gavekal Dragonomics.

"It was a very crude rule of thumb...It was never particularly applicable to provinces such as Guangdong, which have always relied more on export manufacturing and services. And it has been deeply misleading about the economy as a whole for the past three years," he told CNBC.

Former devotees of the index are trying various ways of re-formulating it.

Michael Parker, Asia-Pacific analyst at Sanford C. Bernstein, has constructed his own equivalent, focused on the growing power of the Chinese consumer and attempts to move China towards a more services-based economy. He uses elements like cinema box office receipts and 4G usage to work out what is going on in China's real economy.

"The key here is that, while services account for around half of the economy, they make up around two-thirds of growth," he told CNBC.

By this measure, the Chinese economy is performing better than the results suggested by the Li Keqiang index.

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Parker also thinks recent Chinese moves to downsize the army suggests that the government is optimistic about unemployment figures.

"I hope that they have better information than I do – we can only take their word for it," Parker said.