There is one under-the-radar metric that suggests underperformance in Chinese stocks is likely to continue, DataTrek says

• Weakness in Chinese stocks is likely to continue as the country grapples with a COVID-19 outbreak, DataTrek said on Tuesday.
• The research firm tracks city air quality to get a sense if China's economy has returned to growth.
• "The busier a city is, the more pollution it creates," DataTrek said in explaining its analysis.

The ongoing weakness in Chinese stocks is likely to continue as the country grapples with an outbreak in COVID-19, DataTrek co-founder Nicholas Colas said in a note on Tuesday.

One under-the-radar indicator he used to confirm his view on Chinese stocks is city air-quality data, according to the note.

"The idea here is simple: the busier a city is, the more pollution it creates. Compare current air quality readings, which are available with only a 1-day lag with data from past years, and you get a reasonable assessment of whether output is increasing or decreasing," Colas explained.

While the data may not be perfect due to weather patterns, summer holidays, and measures to reduce air pollution over time, it can still give a near real-time look into how busy a city is. The Beijing Winter Olympics early this year also saw city officials take steps to reduce pollution.

So what does the data show today?

According to Colas, cities across China, including Shanghai, Beijing, Shenzhen, and Tianjin, are experiencing cleaner air compared to 2021. For example, there have been 62 green (clean) days in Shenzhen in 2022, versus just 35 over the same period in 2021. Shenzhen is as a major tech manufacturing city just north of Hong Kong.

While city residents will appreciate the improved air quality, it's not a great sign from an economic point of view, nor is it the best sign for Chinese stock investors.

"Even if China is having real success taming its long-standing air pollution problems, the difference in just one year is large enough to say that economic activity is, at best, unchanged from 2021," Colas said.

This has likely been compounded by the surge in COVID-19 cases over the past months in cities including Shanghai and Beijing, along with their accompanied city-wide lockdowns.

And the pain for investors is not likely to end anytime soon, according to DataTrek, who reminded readers that Chinese stocks were already under pressure prior to the COVID outbreak as regulators crack down on big tech.

"Looking at this data, it is easy to see both why Chinese equities and the yuan itself are under so much pressure over the last few days. Based on this analysis, it is hard to see these trends changing anytime soon," Colas concluded.