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How China’s Credit Growth Might Progress in 2017

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Dec. 28 2016, Updated 10:35 a.m. ET

China’s credit metrics

Financing, or the level of credit available, is crucial to growth since 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

Aggregate financing measures liquidity by adding the total funds provided by a financial system to non-financial sectors and households. China’s aggregate financing stood at 1.7 trillion Chinese yuan in November compared to 896.3 billion Chinese yuan in October. It was the highest level since March 2016.

New yuan loans increase

According to the PBOC (People’s Bank of China), new loans issued by Chinese banks in November were 794.6 billion yuan, which is higher than 651 billion yuan in October. However, economists are expecting lower mortgage lending going forward as authorities clamp down on the housing price bubble.

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M2 money supply down

The broad money supply rose 11.4% YoY (year-over-year) in November 2016 against 11.6% on October. 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.

Going forward, however, credit growth might slow down a bit as policymakers resort to tightening measures to contain the asset price bubbles. Goldman Sachs (GS) also believes that China’s reliance on credit growth could be a key risk in 2017.

If the Chinese 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 SA (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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