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Electricity proxy and real GDP
 

February 28 , 2012

The use of electricity demand as a proxy for economic activity has been employed in China since the 1990s. With officially reported GDP used as the primary performance indicator for provincial development - and for now, the criterion by which governance is evaluated - it is unsurprising that the data that ends up in the statistics bureau is, in the words of a very senior government official "man made."

Some years, such as 2008/9, the electricity proxy correlates closely to what we see on the ground. In other years the relationship is less convincing. For example, according to this preliminary report, China’s economy grew by 9.2% in 2011. Electricity demand grew by 11.5% over the same period. Against other proxies (more on these shortly), electricity growth is too high.

Yesterday, China’s Electricity Council, via Xinhua, reported that electricity demand would grow by an average of 8.8% between now and 2015. Other sources point to a post 2015 deceleration to around 5.6%.

But how accurate is this proxy? I can think of two areas that undermine it.

1. Technical inefficiencies. China’s grid is inefficient and the energy that is generated (generation is used to describe demand) is not the same as the energy that is consumed. Despite the appearance of consolidation, China’s grid companies, State Grid Corp and Southern Grid Corp, preside over multiple local grids that have grown organically around the major points of power consumption such as industrial zones and population centers. Grid tie (i.e., connecting power plants to the network of transmission lines and substations) has been unevenly planned and undertaken. As a result, many grids are poorly loaded and cause deterioration in voltage quality. Officially, transmission losses account for 7% of total output. Anecdotally, I’ve heard 15% mentioned as a more reliable figure.

2. Economic inefficiencies. This concept may be more familiar – the energy that goes into industry doesn’t entirely get translated into value add economic output. Steel is an oft cited example of China’s high energy intensity: it reportedly took (in 2004) three times as much energy to produce a ton of Chinese steel compared to a ton of Japanese steel. Other secondary industries that have been described as energy inefficient in China include cement, refining and coking. It’s hard to put a uniform number on the waste – going on what we know if the arc furnace industry, 20%-30% waste is in the ballpark.

Taking an estimate from the middle gives around a 35% inefficiency ratio. Applying this to the 11.5% electricity growth in 2011 and real demand increased by 7.5% - this would be adjusted upward slightly to accommodate increased efficiencies and the higher growth of China’s service sector to its primary sector – I’ll go with around 7.7% as a rough calculation.

Similarly, the 8.8% of the next three years can be adjusted to around 6%.

Finally, no single proxy should be used on its own. Fine chemicals such as potassium nitrate and economy-wide materials such as coatings, plastics, paper and non-wovens, if you can track them, are helpful indicators. Coatings, for example probably grew by 9% in 2011 (based on GCiS primary research) in real terms.

 

 

 

About GCiS China Strategic Research

GCiS (www.GCiS.com.cn) is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.

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