China’s credit metrics
Financing, or the level of credit available, is crucial to growth because it stimulates consumption and investments in an economy. By tracking the credit growth in China (MCHI), investors can gauge patterns that forecast future demand.
Aggregate financing measures liquidity by adding total funds provided by the financial system to non-financial sectors and households. China’s aggregate financing came to 751 billion yuan in April, down sharply from 2.3 trillion yuan in March. According to the PBoC (People’s Bank of China), aggregate financing declined, partly due to a decrease in corporate bond issuance.
New yuan loans decline
According to the PBoC, China’s new loans fell sharply to 555.6 billion yuan ($85.2 billion) in April, from 1.4 trillion yuan ($211.2 billion) in March. The significant decline in new loans indicates that the central bank is pulling back on lending to avoid debt-fueled expansion of the Chinese economy.
However, the PBoC stated, “TSF and liquidity remained stable after factoring in seasonal effects and local government debt swap.”
M2 money supply has also declined
In April, broad M2 money supply rose 12.8% YoY (year-over-year), which was below the 13.4% rise in March. M2 includes cash, checking deposits, savings deposits, money market mutual funds, and other time deposits.
Most credit growth metrics slowed down in April since the government was paying attention to concerns of over-leverage. China’s central bank, however, maintained that the slowdown in credit growth was temporary.
While higher credit growth can support the steel sector and ultimately higher iron ore prices, debt-fueled expansion isn’t likely to last long. In the case of the government’s less supportive policy in the future, pressure might return to steel mills and seaborne iron ore players. These players include 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 (COMT).