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Do sentiment indicators help to assess and predict actual developments of the Chinese economy?

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  • Aaron Mehrotra
  • Jouko Rautava

Abstract

This paper evaluates the usefulness of business sentiment indicators for forecasting developments in the Chinese real economy. We use data on diffusion indices collected by the People's Bank of China for forecasting industrial production, retail sales and exports. Our bivariate vector autoregressive models, each composed of one diffusion index and one real sector variable, generally outperform univariate autoregressive models in forecasting one to four quarters ahead. Similarly, principal components analysis, combining information from various diffusion indices, leads to enhanced forecasting performance. Our results indicate that Chinese business sentiment indicators convey useful information about current and future developments in the real economy. Moreover, the results could be seen as support for the reliability of the official data on the real economy, as both survey and real sector data seem to reflect the same underlying economic dynamics. … But historically, we always observed in the past that the hard data followed suit soft data. There was a strong correlation. (Jean-Claude Trichet, President of the European Central Bank)1

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Chinese Economic and Business Studies.

Volume (Year): 6 (2008)
Issue (Month): 3 ()
Pages: 225-239

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Handle: RePEc:taf:jocebs:v:6:y:2008:i:3:p:225-239

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Keywords: forecasting; diffusion index; VAR; China;

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  1. Carsten A. Holz, 2004. "China's Statistical System in Transition: Challenges, Data Problems, and Institutional Innovations," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 50(3), pages 381-409, 09.
  2. Ronny Nilsson, 2006. "Composite Leading Indicators and Growth Cycles in Major OECD Non-Member Economies and recently new OECD Members Countries," OECD Statistics Working Papers 2006/5, OECD Publishing.
  3. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(2), pages 147-62, April.
  4. Curran, Declan & Funke, Michael, 2006. "Taking the temperature – forecasting GDP growth for mainland China," BOFIT Discussion Papers 6/2006, Bank of Finland, Institute for Economies in Transition.
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Cited by:
  1. Juuso Kaaresvirta & Aaron Mehrotra, 2009. "Business surveys and inflation forecasting in China," Economic Change and Restructuring, Springer, Springer, vol. 42(4), pages 263-271, November.
  2. Ansgar Belke & Joscha Beckmann & Michael Kühl, 2009. "Global Integration of Central and Eastern European Financial Markets: The Role of Economic Sentiments," Discussion Papers of DIW Berlin 952, DIW Berlin, German Institute for Economic Research.

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