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How Does China’s Credit Growth Outlook Bode for Iron Ore Miners?

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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 3.06 trillion yuan in January 2018. This number is quite high compared to 1.14 trillion a month ago.

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New yuan loans hit a record

China’s new bank loans reached a record of 2.9 trillion yuan in January 2018. This figure is about five times December 2017’s figure. The latest loans figure was even higher than economists’ prediction of 2.0 trillion yuan. Credit demand in December was weaker due to the imposition of limited lending quotas, which might have prompted the rebound in January.

M2 money supply growth

The M2 money supply—which includes cash, checking deposits, savings deposits, money market mutual funds, and other time deposits—grew 8.6% in January 2018 from January 2017. It’s higher than the 8.1% growth we saw in December.

A rebound in the initial months doesn’t necessarily mean that the government’s intervention to slow down the pace of credit creation has failed. In fact, most market participants believe that, going forward, we’ll see a slow-down in total aggregate financing as well as new loans.

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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