Measuring real business condition in China

This paper constructs a monthly Chinese business condition index (CBCI) by using a mixed-frequency state-space model to incorporate economic indicators from different frequencies. The modeling strategy is necessary to account for the Chinese labor market conditions. When choosing the components, we pay special attention to the reliability of Chinese data by avoiding the variables that are likely subject to government manipulation or mismeasurement. Comparisons of the CBCI and official indicators show discrepancies before 2009 and consistency afterwards, supporting the argument that Chinese official data improve markedly after 2008. An out-of-sample prediction justifies the usefulness of the CBCI in forecasting the private sector's perception of the business conditions.