Extended China holidays have finished but the virus outbreak continues to rage. Economic damage stemming from consumption shock seems to have been priced in asset prices and the main trading theme is now production recovery. The signs of resumption or in contrast extension of the downtime are undoubtedly the key drivers of market sentiments but are there any leading indicators to watch?

Last week, the head of Politburo Xi warned officials that containment measures had gone too far and threatened the economy. This was followed by a series of monetary measures and fiscal decisions that should boost the country’s credit growth and widen budget deficit. Estimates of China’s GDP growth in the first quarter, in connection with recent developments, have already reached 0% YoY on the worst end of spectrum.

Local authorities of cities near Wuhan closed schools and factories, blocked bridges and railways, canceled all public events and basically imprisoned dwellers of residential buildings. Xi said some measures were impractical and only sowed unnecessary panic.

Morgan Stanley analysts, in turn, turned a sore point of China economy – air pollution, into a “leading” indicator of recovery in production. Government monthly production data, coal burning, or public transportation figures are certainly helpful to assess its pace but there is decent lag in them because of time that takes to gather and release the data. In contrast, the instant response of environment to energy production (basic feature of economic activity) ensures that air pollution is probably the most leading indicator that we can get. Below are charts for Guangzhou and Chengdu air pollution levels recorded in January-February 2020 compared with a six-year average:

On the left charts it can be seen that pollution level rises at the beginning of the year, which reflects an increase in traffic during the holidays, as well as production rebound in February. This year situation is different. The level of pollution dropped to 40% of the six-year average in both cities. Steady increase in pollution levels will likely indicate a recovery in production, and the sooner this happens, the more positive will be markets reaction. Real-time data can be found for example here https://aqicn.org/city/guangzhou/.

On Monday, China went to work after holidays extended by 10 days, but the morning commuter trains were half full, and many factories were still closed.

The propaganda department of the Politburo ordered the media to focus on covering economic recovery, a source told Reuters.

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