China’s credit metrics and iron ore prices
Financing 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.
Aggregate financing accelerates
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 ~1.39 trillion Chinese yuan in April 2017, as compared to ~2.1 trillion yuan in March 2017. The median estimate was 1.15 trillion yuan.
New yuan loans
According to the People’s Bank of China, new loans issued by Chinese banks in April 2017 totaled 1.1 trillion Chinese yuan, higher than the 1.0 trillion yuan issued in March 2017. It was also higher than the median estimate of 815 billion yuan.
M2 money supply growth
The broad money supply rose 10.5% YoY (year-over-year) in April 2017—lower than March’s 10.6% and the expectation of 10.8%. The M2 money supply includes cash, checking deposits, savings deposits, money market mutual funds, and other time deposits.
Slowing credit growth?
There was an apparent disconnect between aggregate financing and M2 growth. Some analysts are worried that this could be problematic and could lead to a liquidity crunch. While the overall credit picture for April was mixed, the government’s curbs might take some time to take full effect.
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 (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).