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Goldman Sachs: Look at exports and commodities to judge China's economic transition

Those looking for proof of China's economic rebalancing act should stay clear of macro data and focus instead on micro evidence, according to Goldman Sachs.

The investment bank released a research note Tuesday, detailing how changes in the composition of exports and commodity consumption are the most useful metrics to evaluate how Beijing is moving toward a consumption-led model, the so-called new economy.

"While the exports share of gross domestic product (GDP) in China today is similar to the level seen in the mid-1990s, the types of goods exported by China have changed significantly" Goldman explained.

Footwear, clothing, and toys were the top five categories of Chinese exports back in 1995, while telecom equipment, automatic data processing machines, cathode valves, furniture, and jewelry became the top five exports in 2014, GS noted.

"This is evidence that China has been moving up the export value chain."

Commodity consumption provides another way of measuring China rebalancing since changes in consumption can reveal shifts in underlying economic activities, Goldman noted.

Appetite for 'new economy' commodities, such as soybeans, nickel, and gasoline, have risen in recent years, versus 'old economy' resources like wheat, steel, and diesel that have been relatively stable, the note said.

Goldman offered the following explanation for its selection of 'new economy' commodities.

Soybeans are often used as animal feed in countries where the demand for meat and dairy is high, nickel is used to make stainless alloys for industrial and consumer products, while gasoline, jet fuel and LPG are better indicators of consumption than industrial-related products like diesel and fuel oil.

Avoid these

It may be tempting for economists to evaluate the transition based on the investment-to-GDP metric, seeing as investment-led growth was a key characteristic of China's 'old economy,' but China's investment share of GDP is unlikely to fall significantly, Goldman warned.

"The sharp increase in China's investment-to-GDP ratio over the past 35 years is comparable to the experience of Japan and the four Asian Tigers (Hong Kong, Singapore, South Korea, and Taiwan) at similar income levels. The broader trend suggests that the investment-to-GDP ratio does not decline until income reaches much higher levels than those in China at present."

The investment bank also debunked another commonly cited metric: the "Keqiang Index," which measures hard data such as railway freight volume, electricity consumption, and bank lending to gauge the economy's growth rate.

Named after Chinese Premier Li Keqiang, the gauge doesn't reveal the developing shift away from the old to the new economy, Goldman said.

"Railway passenger traffic has been outpacing railway freight volume, electricity consumed by tertiary industries and households have been rising faster than electricity consumed by primary and secondary industries, and equity and bond markets have become increasingly important in providing credit flows relative to bank lending."

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