uploads///Aggregate financing

Will China’s Credit Growth Crackdown Mean Weakness in Iron Ore?

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Feb. 1 2018, Updated 7:30 a.m. ET

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 1.14 trillion yuan in December 2017. The figure missed economists’ estimate of ~1.5 trillion yuan.

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New yuan loans

China’s new yuan loans in December 2017 totaled 584.4 billion yuan, which was 460 billion yuan lower than the loans a year ago. The actual growth in loans was much lower than the expected 1 billion yuan. Loans were also their lowest since April 2016. While loans disappointed in December, in 2017 as a whole, loans reached a record high of 13.53 trillion yuan. The slowdown is December might also be due to seasonal factors, as bank lends less in the last months due to tight loan quotas and capital charges.

M2 money supply growth

The M2 money supply—which includes cash, checking deposits, savings deposits, money market mutual funds, and other time deposits—grew 8.2% from December 2017, which was 3.1% lower than the growth recorded a year ago. It was also much lower than the 9.1% expected. The growth in M2 also hit a record low in December.

All the above factors showed a deceleration in the credit growth in the Chinese economy for December 2017. While this could be a temporary phenomenon, analysts also believe this could be a start to China’s longstanding aim of cutting down financial risks. Most economists believe the current pace of credit growth should ease in 2018 as monetary policy tightens to avoid financial risk.

Slower 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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