Chart of the Week: CMI 2.0 Strong, But for All the Wrong Reasons

We first published our China Momentum Indicator 2.0 (CMI 2.0) last month. It is based on a broader basket of indicators, seven of which were not included in our CMI 1.0, with the aim of better capturing economic activity in China.

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CMI 2.0 stood at 8.2% in July, 0.2 percentage points higher than June’s revised reading. This marks a significant rebound from the trough of 2.3% in October 2015, a consequence of China’s policymakers resorting to what they know best and re-administering the growth medicine of 2008–2009.

Those hoping that this pickup in economic activity will be sustainable are likely to be disappointed. Of the ten subcomponents included within our CMI, those associated with China’s old model of investment-led growth are primarily responsible for the rebound: all three freight indicators, especially railway freight, as well as real imports and the commodity price index.

While policymakers’ current tactics may boost China’s economic growth in the short term, the inefficiency with which credit is being distributed, alongside limited evidence of rebalancing, is harming China’s long-run growth prospects.

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