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What’s behind China’s Weak Credit Metrics in February?

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Updated

China’s credit metrics

Financing, or the level of credit available, is crucial because it stimulates consumption and investment in an economy. By tracking the credit growth in China (MCHI), investors can gauge patterns that forecast future demand.

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Aggregate financing plunged

Aggregate financing measures liquidity by adding total funds provided by the financial system to non-financial sectors and households. China’s aggregate financing came down drastically to 780.2 billion yuan in February as compared to 3.4 trillion yuan in January.

New yuan loans are down sharply

New yuan loans issued by Chinese banks came in at 726.6 billion yuan in February as compared to 2.5 trillion yuan in January.

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M2 money supply down too

Broad money supply (or M2) rose 13.3% as compared to a growth of 14.0% year-over-year in January. It includes cash, checking deposits, savings deposits, money market mutual funds, and other time deposits. The broad money supply also slowed down in February in-line with other credit measures.

While most of the credit growth metrics slowed down considerably in February as compared to January, the most likely cause is seasonality rather than the change in economic fundamentals. The Chinese new year fell in February, which reduced the working days in the month. Economists are expecting more rate cuts and other loosening measures from the government and central bank to kickstart the economy.

However, investors need to note that not many of the new loan disbursements are reaching the steel sector given the losses and weak outlook. This means pressure on steel mills and in turn, on seaborne iron ore players. This category includes BHP Billiton (BHP) (BBL), Rio Tinto (RIO), Vale (VALE), and the Asia-Pacific division of Cliffs Natural Resources (CLF). BHP’s listings form 6.3% of the iShares Commodities Select Strategy ETF (COMT).

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