Financing, or the level of credit available, is crucial because it stimulates consumption and investment in the economy. By tracking credit growth in China (MCHI), investors can gauge patterns that forecast future demand.
Aggregate financing is down month-over-month
Aggregate financing, China’s broadest measure of new credit and liquidity, came in at 1.05 trillion yuan for April as compared to 1.18 trillion yuan for March. It also came in below economists’ expectations of 1.2 trillion yuan.
New yuan loans drop
New yuan loans, or new lending minus loans repaid, were 707.9 billion yuan as compared to 1.18 trillion yuan in March. New yuan loans also missed economists’ expectations of 903 billion yuan.
M2 money supply is weak too
China’s M2 money supply measures M1 (cash and checking deposits) and near money. It is important to gauge the level of liquidity in the economy. M2 growth moderated to 10.1% from earlier this year as compared to a growth of 11.6% year-over-year (or YoY) in March.
China’s credit growth clearly has been weaker than expected, especially given the recent easing measures adopted by the government. This negatively impacts companies like Rio Tinto (RIO), BHP Billiton (BLT) (BHP), Vale (VALE), and Cliffs Natural Resources (CLF). It also affects the iShares MSCI Global Metals & Mining Producers ETF (PICK) and the SPDR S&P Metals & Mining ETF (XME). PICK invests in the iron ore sector. It has 17.9%, 2.6%, and 10.8% holdings in BHP Billiton, Vale, and Rio Tinto, respectively. XME also invests in some of these stocks.