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China’s Real Estate Climate Index is Back from Its Lows

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Real estate climate index back from lows

China’s real estate climate index has gained in the last two months. The index was up 0.40 basis points to 93.03 in July. Prior to this gain, the index had fallen in every month but October since February 2014.

The chart below shows the progression of China’s real estate climate index. China’s construction activity seems to have started responding to China’s stimulus measures, including four rate cuts since November 2014.

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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. Index figures above 100 indicate economic growth, and 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 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).

Because demand for iron ore is derived from a demand for steel, any slowdown in the property sector is negative for iron ore prices. It is 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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