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China’s Credit Growth and the Impact on Iron Ore Miners

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China’s credit metrics

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

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Aggregate financing rises 

Aggregate financing measures liquidity by adding the total funds provided by a financial system to nonfinancial sectors and households.

China’s aggregate financing amounted to 1.5 trillion yuan in August compared to 488 billion yuan in July 2016. The median estimate was close to 900 billion yuan.

New yuan loans rose

According to the People’s Bank of China (or PBoC), new loans issued by Chinese banks were at 949.0 billion yuan in August compared 463.6 billion yuan in July.

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M2 money supply also rises

The broad money supply rose 11.4% year-over-year (or YoY) in August. Against this, analysts were forecasting 10.5% YoY growth. M2 includes cash, checking deposits, savings deposits, money market mutual funds, and other time deposits.

Month-over-month, the credit metrics in China have been quite volatile. But overall in 2016, loan and aggregate financing growth remains strong. This indicates that the PBoC is extending its support to the Chinese economy.

China’s rising new credit is a warning sign for the global economy (ACWI) (VTI). According to data from the PBoC, China’s new credit is rising. The country’s debt-to-GDP ratio is also rising. The IMF (International Monetary Fund) has warned China about the risks of unsustainable credit growth and financing weak firms. According to James Daniel, the IMF mission chief for China, “China’s corporate debt is still manageable, but at approximately 145 percent of GDP, it is high by any measure.”

If the government keeps its policy less supportive in the future, pressure could return to steel mills and seaborne iron ore players. These players include BHP Billiton (BHP) (BBL), Rio Tinto (RIO), Vale SA (VALE), and the Asia-Pacific division of Cliffs Natural Resources (CLF).

BHP’s listings form 6.3% of the iShares Commodities Select Strategy (COMT).

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