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These Charts of Steel Show How China's Credit Boost Is Made to Last

Infrastructure has a longer impact than property.

China's efforts to stimulate its economy are showing up in steel.

Months after the country's policy makers loosened the reins on credit in a bid to fan economic growth, there's growing evidence that local demand for steel IS picking up, and the good news for metal fans is that the gains are here to stay at least until mid-2017.

That's the conclusion of Goldman Sachs Group Inc. analysts who've studied the relationship between credit, investment and the commodity in recent years. They calculate that China's steel consumption rose 7 percent in September and October compared with a year earlier, after being relatively flat the first eight months of 2016.

"The impact of credit stimulus on steel consumption lasts on average for more than a year," the bank's analysts, led by Commodity Strategist Hui Shan and Chief Asia Pacific Economist Andrew Tilton, wrote in a note to clients Tuesday. Even an immediate slump in credit creation back to 2014 levels would still leave enough money pumping through the economy to support steel demand until mid-2017, they wrote. 

Source: Goldman Sachs

With few signs yet of officials moving to rein in leverage, steel demand is expected to stick around, depending on the types of investment being stimulated by additional credit.

"It's important to not only follow the timing and size of credit flows but also track where the credit is going," the Goldman analysts say. "Infrastructure projects tend to take much longer to complete than housing units," and have a more prolonged impact on steel demand, they add.

Source: Goldman Sachs

For fixed-asset investment in infrastructure, the peak of the boost for steel is the second quarter after the initial pick-up in spending, with a total length of four quarters. By comparison, property construction offers an "immediate" but "short-lived" impact, at about two quarters, Goldman says. "Such differences are important because it means that the profile of the credit boost to steel consumption may vary depending on where the government directs credit flows," the analysts add.

Source: Goldman Sachs

Some of Beijing's policies — such as the future of a tax rebate on cars and tightening measures in the real estate market — pose a risk to the outlook. But for now, "even under conservative assumptions, metal demand in China will probably remain healthy" through the first half of next year, the Goldman analysts conclude.

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