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How China’s Credit Growth Could Progress in 2018

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Aggregate financing

Aggregate financing in China (MCHI), which reflects the total funds provided by a financial system to its nonfinancial sectors and households, came in at 1.6 trillion yuan in November 2017. While the financing in November came in higher than ~1.0 trillion yuan of aggregate financing in October 2017, it missed the economists’ estimate of ~$1.3 trillion yuan.

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New yuan loans

In November 2017, new yuan loans stood at ~1.1 trillion yuan. This is higher than industry estimates, which called for new yuan loans of 800.0 billion yuan.

M2 money supply growth

In line with the pick up in the two above-mentioned factors, the M2 money supply growth also grew in November 2017. The M2 money supply grew 9.1% in November compared to 8.8% in October.

The growth in October marked the record low since the data collection started in January 1996. The money supply growth was also higher than what economists were projecting for the month.

The M2 money supply encompasses cash, checking deposits, savings deposits, money market mutual funds, and other time deposits.

Chinese authorities must balance between providing steady financing and curbing lending that can fuel financial risk. Most economists believe that the current pace of credit growth should ease in 2018 as monetary policy is tightened to avoid financial risk.

Lower-than-expected credit growth, in turn, could also mean lower demand for steel as well as iron ore, which would be negative for raw material suppliers (XME) to steel mills such as Rio Tinto (RIO), BHP Billiton (BHP)(BBL), Vale (VALE), and the Asia-Pacific division of Cleveland-Cliffs (CLF).

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