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Will Iron Ore Prices Benefit from China’s Credit Growth Prospects?

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China’s credit metrics and iron ore prices

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

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Record aggregate financing

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 ~3.7 trillion Chinese yuan in January 2017, as compared to 1.6 trillion yuan in December 2016.

This is the highest monthly figure. The median forecast called for 3.0 trillion yuan worth of aggregate financing in January.

New yuan loans increase

According to the PBOC (People’s Bank of China), new loans issued by Chinese banks in January 2017 totaled 2.03 trillion Chinese yuan—higher than 1.0 trillion Chinese yuan in December 2016 and the second-highest monthly total on record.

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M2 money supply up

The broad money supply rose 11.3% YoY (year-over-year) in January 2017 same as December 2016. The M2 money supply includes cash, checking deposits, savings deposits, money market mutual funds, and other time deposits.

All the credit metrics showed strong growth in January. Investors should, however, note that the credit numbers in China are usually higher in the initial months of the year as the government renews banks’ credit quotas. So we might have to wait for the credit data for a few more months to get a clearer picture of the growth in 2017.

Slowing credit growth?

Credit growth may slow a bit, however, as policymakers resort to tightening measures to contain the asset price bubbles. Goldman Sachs (GS) 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 would include BHP Billiton (BHP) (BBL), Rio Tinto (RIO), Vale (VALE), and the Asia-Pacific division of Cliffs Natural Resources (CLF).

Notably, BHP accounts for 6.3% of the iShares Commodities Select Strategy ETF (COMT).

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