Beijing’s Smoggy Skies Obscure China Slowdown

China’s economy kicked off 2018 strongly, but it doesn’t look sustainable
By Nathaniel Taplin

The Forbidden City on a once-again smoggy Beijing day last month. 

China’s economy started 2018 with a roar—or rather a chesty cough.
Steel production surged, up almost 6% in January and February from a year earlier, as did investment in the crucial real-estate sector, which rose at the fastest pace since late 2016. 

Is it game on again in the world’s second-largest economy?
Not so fast. 

The industrial economy bounced back in the opening months of 2018—and so did air pollution in northern China, after a blessedly clean winter. 

But credit growth slowed again, and is now expanding at its weakest pace since mid 2015, when the economy was firmly in the doldrums. 

Leading indicators such as housing sales also weakened.
What does that combination tell you? 

Both the pronounced industrial weakness at the tail end of 2017 and the sharp rebound now are direct the result of the pollution crackdown which—temporarily—cleared up Beijing’s skies in November and December. 

Growth in steel production and housing investment hit at least half-year lows in December as construction ground to a halt: now that the seasonal restrictions are being softened, that pent-up demand is being released.
None of that changes the overall trend of slowing activity that has been evident since mid-2017. 

On a three-month moving average basis, growth in real-estate investment peaked in April, while steel output peaked in August. 

And with infrastructure investment now weakening as policy makers dial back the deficit and fiscal stimulus, there is little prospect of a sharp rebound in overall investment this year.
China’s economy is still getting a strong shot in the arm from global growth, and the property slowdown has, so far, been manageable. 

As long as a trade war doesn’t really derail global growth this year, the chances of a big blowup in China in 2018 remain slim.
That being said, today’s data wasn’t a go signal either—commodities such as copper and oil have been struggling recently for a reason. 

Given the headwinds from a slowly decelerating China, another big leg up for commodity markets in 2018 looks questionable.