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China’s Real Estate Climate Index Touches Multi-Year Low in May

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Real estate climate index drops further

China’s real estate climate index has fallen every month but October since February 2014. The index dipped to 92.43 in May compared to 92.56 in April. This is a new multi-year low.

The above chart shows the progression of China’s real estate climate index. China’s construction activity remains weak despite the government’s easing efforts. However, government efforts may still show results in the future.

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China’s real estate climate index

China’s National Bureau of Statistics updates its real estate climate index on a monthly basis. The index measures the country’s aggregate business activity for land and real estate. The index is useful for analyzing trends in the Chinese real estate industry, which accounts for 15% of the Chinese economy. Index figures above 100 indicate economic growth, while readings below 100 suggest a slowdown in the market.

Impact on iron ore names

The property sector has direct implications for global steel demand and thus for companies that produce steel. These companies include U.S. Steel (X) and POSCO (PKX). U.S. Steel currently forms 4.1% of the SPDR S&P Metals and Mining ETF (XME).

Since demand for iron ore is derived from a demand for steel, any slowdown in the property sector is negative for iron ore prices. It’s also negative for stock prices of Rio Tinto (RIO), BHP Billiton (BLT) (BHP), Vale SA (VALE), and Cliffs Natural Resources (CLF). The fallout also affects funds like the iShares MSCI Global Metals & Mining Producers ETF (PICK) that invest in iron ore stocks .

There are other real estate indicators investors can track to get an idea of the direction of iron ore prices. We’ll discuss these indicators in the next part of this series.

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