Rising air pollution in China suggests its economy is growing faster and oil prices will climb

• Rising air pollution in China suggests its economy in on track to see a jump in growth, according to DataTrek Research.
• Oil prices should rise if China's economy is accelerating, as its air quality suggests.
• "We prefer owning US large cap energy to Chinese equities to play this turn," DataTrek said.

Rising air pollution in China's five largest cities suggests its economy is about to see a surge in growth, according to a Monday note from DataTrek Research.

The firm monitors China's daily air-quality readings, and higher pollution has exhibited a strong correlation to economic growth. While dirty air is bad for the country's citizens, it's a welcome sign for the country's economy, which has seen decelerating growth over the past few quarters.

"The country's slow recovery from its prolonged pandemic-related shutdown was visible in the skies over the country's major cities long before it showed up in the official economic data. This proves our basis point that air pollution readings can give investors an early call on a country's economy," DataTrek Research co-founder Nicholas Colas said.

As more factories ramp up production, more consumers travel, and more people consume, pollution increases and air quality deteriorates.

He said recent air-quality data for five of China's largest cities suggest the country's economic recovery is getting underway.

In fact, the air quality in Beijing has seen a "very visible" increase in air pollution in the last two weeks, as has Guangzhou, Chongqing, Shenzhen, and Shanghai. 

"Air quality readings are finally suggesting a return to better growth for the Chinese economy," Colas said.

While the readings are still cleaner than levels seen in 2019, they're tracking considerably higher than the past few months.

To be sure, it will take weeks for the recent rise in China's air pollution to register in the official economic data. But if it does, he said it would signal "synchronized economic expansion." 

All of this suggests to Colas that oil prices could be headed higher in the coming months as China's economy sees a rebound in growth. 

"If this call is correct, the first place we should see it is in global oil prices. US large cap Energy stocks are therefore a sensible play if the Chinese economy is really starting to get back on track," he said, adding that he prefers to own US large cap energy stocks over Chinese stocks to take advantage of the recent uptick in the country's air pollution.

Brent crude prices soared over the summer and neared $100 per barrel in September but have since retreated sharply, hovering around $86 on Monday.