Must-know: Why credit conditions are tightening in China

Anuradha Garg - Author
By

Aug. 18 2020, Updated 5:16 a.m. ET

Why is financing so important?

Financing or the level of credit availability is crucial since it stimulates consumption and investment in an economy. Most of China’s banks are state-owned. The state exercises great control over consumption and investment patterns by regulating finance through new loans issuance, money supply, and social financing.

So by tracking the state of financing, investors can gauge patterns for forecasting future demand.

Aggregate financing

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Aggregate financing is China’s broadest measure of new credit and liquidity. It came at 957.4 billion yuan in August, up 683.7 billion yuan month-over-month and down 626.7 billion yuan year-over year (or YoY). This is compared with economists’ estimate of the 1135.0 billion yuan median that was surveyed by Bloomberg.

New yuan loans down YoY

New yuan loans, which measures new lending minus loans repaid, came in at 702.5 billion yuan for August, down 10.3 billion yuan from a year ago. This indicates weak demand for financing amid slowing investment in the infrastructure and property markets.

M2 money supply lowest in five months

M2 money supply is the measure of money that includes cash and checking deposits (or M1) as well as near money, which includes saving deposits, money market mutual funds, and other time deposits. M2 grew by 12.8% in August year-over-year. The growth is lower than July when M2 grew by 13.5% YoY. Slowdown in M2 growth was mainly due to moderating social credit expansion.

Overall tightening credit conditions

China is the lifeline for commodity suppliers, and all the above measures depict that it isn’t doing that well. First, indicators like aggregate financing continue to show that liquidity is tightening in China. Second, M2 is also showing some weakness. Last but not least, the new yuan loans have also dropped YoY.

These have negatively impacted industrial output, which affects how much iron ore is consumed and so negatively impacts iron ore names like Rio Tinto (RIO), BHP Billiton (BHP), Vale SA (VALE), and Cliffs Natural Resources (CLF).

Investors can look at the SPDR S&P Metals and Mining ETF (XME), which invests in this sector.

To read more about the iron ore industry and the iron ore players, see Market Realist’s series Must-know: An overview of the iron ore industry.

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