Why China’s industrial output points to slow economic growth

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What do industrial production and fixed asset investment mean?

Industrial output measures the output of businesses integrated in the industrial sector of the economy, such as manufacturing, mining, and utilities. Fixed asset investment (or FAI) is a measure of capital spending. It refers to any investment in physical assets, such as real estate infrastructure and machinery, that are held for more than one year.

FAI is a good indicator for how much investment is occurring in a country or region. FAI is a closely watched indicator of construction activity in China.

 

Industrial output

Industrial production at its lowest level since 2008

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China’s industrial production growth slowed to its lowest level since the 2008 global financial crisis. According to the monthly data released by the National Bureau of Statistics, industrial output (or factory production) for August increased by 6.9% year-over-year compared to 9.0% for July. FAI increased 16.5% in the January–August period after increasing by 17.0% in the January–July period.

Both of these measures are pointing towards weakening economic prospects. If such a situation prevails, it would be difficult for China to reach its targeted gross domestic product (or GDP) growth rate of 7.5% for the third quarter.

What does this mean for iron ore names?

Industrial production and FAI are the barometers for economic health. These are below market expectations, and rate of growth has declined. This in turn is negative for industries, including steel, which has a direct impact on iron ore prices. So this is negative for companies like Rio Tinto (RIO), BHP Billiton (BHP), Vale SA (VALE), and Cliffs Natural Resources (CLF) and for ETFs like the SPDR S&P Metals and Mining ETF (XME).

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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