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Can China’s Credit Growth Support Iron Ore Prices?

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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 credit growth in China (MCHI), investors can gauge patterns that forecast future demand.

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Aggregate financing lower

Aggregate financing measures liquidity by adding the total funds provided by a financial system to nonfinancial sectors and households. China’s aggregate financing stood at 896.3 billion Chinese yuan in October, lower than the 1.7 trillion yuan (about $250 billion) reported in September. It was also lower than the median estimate of 1 trillion yuan.

New yuan loans dropped

According to the PBOC (People’s Bank of China), new loans issued by Chinese banks stood at 651 billion yuan in October, 47% lower than 1.2 trillion yuan reported in September (about $180 billion). This result was, however, in line with the Bloomberg median forecast of 672 billion yuan.

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M2 money supply rises

The broad money supply rose 11.6% YoY (year-over-year) in October. Against this, analysts were forecasting an 11.4% YoY growth. M2 includes cash, checking deposits, savings deposits, money market mutual funds, and other time deposits.

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

China’s rising new credit is a warning sign for the status of the global economy (ACWI) (VTI). Billionaire investor George Soros has expressed concern several times about China’s (ASHR) (MCHI) new credit growing.

If the government keeps its policy less supportive in the future, pressure could return to steel mills and seaborne iron ore players. Affected players include BHP Billiton (BHP) (BBL), Rio Tinto (RIO), Vale (VALE), and the Asia-Pacific division of Cliffs Natural Resources (CLF). BHP accounts for 6.3% of the iShares Commodities Select Strategy (COMT).

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