Earlier this week, we got further evidence of just how quickly China’s economy is slowing down (hard landing anyone?) when the March manufacturing PMI printed in contraction territory, the employment sub index dove to Lehman levels, and rail freight fell 9%. While disconcerting, this isn’t all that surprising given that if one looks at what really matters (i.e electricity usage, rail freight volume, and credit growth), it’s pretty clear that China’s economy isn’t expanding at anywhere near the targeted 7% and hasn’t been for quite some time: And the weakness may well persist as PM Li wages “war” on a familiar adversary: smog. Beijing is set to close all major coal power plants by 2016 including an 845-megawatt plant owned by China Huaneng Group. They’ll be replaced by natural gas facilities that will generate two-and-a-half times the power. As Bloomberg reports, this should have a fairly dramatic effect on air quality: Shutting all the major coal power plants in the city, equivalent to reducing annual coal use by 9.2 million metric tons, is estimated to cut carbon emissions of about 30 million tons, said Tian Miao, a Beijing-based analyst at North Square Blue Oak Ltd., a London-based research company with a focus on China. It may also have a noticeable effect on economic output. Here’s Deutsche Bank: Almost universal from companies is a lack of understanding of the public reported GDP numbers and a lack of correlation to what they see. Many names see the actual GDP rate in China for the past 3 years as being more like the 5-6% level and that 2015 is likely to be at a similar year. Interestingly most feel that the region’s ability to achieve anything more than this (i.e. 8+%) is severely constrained for the next few years by the much needed pollution control. Mentioning pollution and corruption in China is not new; however, the sharp increase in state focus on both issues is clear. The slowing of the economy may be the price of fixing these issues… The costs to China’s sputtering economic growth machine aren’t likely to be small either. In fact, Bloomberg estimates suggest industrial output may have to be slashed by a fifth in order for Beijing to hit its own pollution targets and by up to 40% if China wants its citizens to be able to breathe the same air as the rest of the world: How big is the hit? China's government is targeting a PM2.5 level of 35 micrograms per cubic meter. In 2014, the level was about 60. Our estimate suggests that without any changes in industrial structure or other abatement efforts, getting there would require a reduction in industrial output of as much as 20 percent. Getting down to the international clean air standard would be even tougher. The level recommended by the World Health Organization is 10 micrograms per cubic meter. Absent other measures, that would mean taking China’s industrial output down 40 percent. * * * So there you have it. Expect the Chinese economy to decelerate further going forward and expect Beijing to blame it on the smog.