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When China expands credit and its money supply, the proceeds are inevitably used to build things, whether it makes economic sense or not. Building things requires raw materials and Canadian resource companies are happy to help out.
This symbiotic relationship can be quantified by comparing year-over-year growth in the Chinese money supply (M2 in this case) and the performance of the S&P/TSX Diversified Mining Index. (see chart)
China reported June money supply growth of 14.0 per cent Friday, 1.2 per cent below expectations, in what constitutes another nail in the coffin for domestic and global miners.
At 14.0 per cent, money supply growth is still robust. But, it's also two per cent lower than it was in January. For asset prices, it's the rate of change that matters most so a lower growth rate is likely to result in lower stock prices for companies associated with the trend.
China's central government has shown increasing concern with credit growth and this makes it highly unlikely that money supply is set to expand quickly in the near future. This trend is more bad news for a sector that already has had its fair share.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .