There is a running joke in Beijing that if you want to know how the Chinese economy is doing, just look out of your window. The thicker the smog, the better things are.
In reality, air pollution lines up best with particular parts of the economy—especially the housing-driven heavy industry sector. During the last two big run-ups in home prices in early 2017 and late 2018, pollution levels roared back after dipping. In recent months they have been trending sharply lower again in much of China. That is good news for Chinese joggers and athletes, but adds to other signs that China’s construction sector, after two years of steady strength, is starting to weaken.
The clues hinting at that deterioration have been piling up for a while. China’s purchasing managers index for the construction sector remained at a high level in October, but was down sharply compared with the same month of last year. Heavy-industry output growth is weakening, and steel prices are down around 20% from their late-2018 peak. Home price momentum has weakened too: Prices are now up around 8% from a year earlier, versus 11% in mid-2019.
Air pollution data is the latest confirmation of this trend. On a three-month moving average basis, the concentration of fine particulate matter in Beijing’s air has fallen sharply from a year earlier since April. That is the month after heavy-industry output growth peaked.
Two broader gauges measuring particulate levels in the Yangtze River Delta and northern central China averaged 8% and 21% lower than a year before in the three months to September, respectively. This comes even as policy makers are softening pollution targets to help struggling factories. The government said in October it was seeking a 4% drop in fine particulate matter in northeastern China this winter, less ambitious than the 5.5% draft target.
These signs of softening in heavy industry, along with rising bond yields, help to explain the Chinese central bank’s unexpected 0.05 percentage point cut to rates on one of its key lending facilities Tuesday. The People’s Bank of China doesn’t want to set off another lending frenzy: Home prices are still rising, if less strongly than before, and food prices are out of control because of the African swine fever epidemic. But officials may have decided it was time for a reminder that the PBOC stands ready to intervene if the housing market deteriorates too rapidly.
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