Alternative Indicators for Chinese Economic Activity Using Sparse PLS Regression

Abstract

Official Chinese GDP growth rates have been remarkably smooth over the past decade, in contrast with alternative Chinese economic data. To better identify Chinese business cycles, we construct a sparse partial least squares (PLS) factor from a wide array of Chinese higher-frequency data, targeted toward variables that are highly correlated with important aspects of the Chinese economy. Our resulting alternative growth indicator clearly identifies Chinese business cycle fluctuations and it performs well both in out-of-sample testing for China as well as when applied to other economies. Using this indicator, we decompose deviations from growth trends into global growth, credit supply, and monetary policy components, and this decomposition suggests that, in contrast to China’s 2015-16 slowdown, the country’s 2018-19 slowdown was mainly due to deteriorating domestic credit conditions.

Citation

Groen, J. J. J. and M. B. Nattinger (2020), “Alternative Indicators for Chinese Economic Activity Using Sparse PLS Regression” Economic Policy Review: Vol. 26, pages 39–68.