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How Will China’s Credit Growth Tightening Affect Iron Ore?

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Aggregate financing

Aggregate financing, which measures liquidity, is the total funds provided by a financial system to nonfinancial sectors and households. China’s (MCHI) aggregate financing stood at ~1.06 trillion Chinese yuan in May 2017, compared to ~1.39 trillion yuan in April 2017. The median estimate was 1.19 trillion yuan.

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New yuan loans

The new loans issued by Chinese banks in May 2017 totaled 1.11 trillion Chinese yuan, compared to 1.10 trillion yuan issued in April 2017. They were also higher than the median estimate of 1.0 trillion yuan.

M2 money supply growth

The broad money supply rose 9.6% YoY (year-over-year) in May 2017—lower than April’s 10.5% and expectation of 10.4%. The M2 money supply includes cash, checking deposits, savings deposits, money market mutual funds, and other time deposits.

Credit growth slowing

All credit measures are showing a deceleration, which is in line with China’s efforts to rein in financial leverage in the system. Borrowing costs have risen to a two-year high. The central bank commented that slower M2 growth would become a “new normal,” which shows the government’s curbs are taking effect.

If the Chinese government’s policy becomes less supportive in the future, the steel demand from the property sector might taper off. Under that scenario, pressure could return to steel mills and seaborne iron ore players. BHP (BHP) (BBL), Rio Tinto (RIO), Vale (VALE), and the Asia-Pacific division of Cliffs Natural Resources (CLF) would be the affected players.

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

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