What is the Chinese Credit Impulse?
45sClear, concise explanation of a complex financial concept that traders care about, making it highly educational and shareable.
▶ Play ClipAI Summary
The video explains the Chinese credit impulse, a key economic indicator that measures the growth of new credit relative to GDP growth, and questions its future utility given China's shifting economic priorities, particularly the government's efforts to curb property speculation.
Chapters
[00:00]
Introduction to the Chinese Credit Impulse
The video opens by noting that the Chinese credit impulse is a common topic among traders and macroeconomists, but few have defined it or questioned its relevance.
[00:43]
Definition of the Credit Impulse
The credit impulse is defined as the growth in credit divided by the growth in GDP. When credit growth outpaces GDP growth, the impulse rises; when it lags, it falls.
[01:16]
Why Economists Care
The credit impulse is heavily correlated with Chinese manufacturing and services PMIs, which are survey-based indicators of economic health. It also serves as a leading indicator for real growth in China, as official GDP numbers are often politically motivated and stable.
[02:20]
Questioning Its Future Utility
The speaker questions the indicator's future usefulness because the main drivers of credit growth—property developers and mortgages—are being targeted by government policies to reduce housing prices and speculative lending.
[03:27]
Potential Divergence
The Chinese economy could perform well even if the credit impulse trends lower, due to reduced demand for property development and a system designed to keep prices down.
[03:40]
Growing Popularity and Irony
Investors have paid more attention to the credit impulse since PIMCO's 2020 piece, but the speaker notes that just as it becomes ubiquitous, it may matter less.
The Chinese credit impulse, while historically a reliable indicator, may lose its predictive power as China's economic priorities shift away from property-led growth. Investors should be cautious about relying on it without considering these structural changes.
Mentioned in this Video
💡 Key Takeaways
📊
Definition of Credit Impulse
Provides a clear, concise definition of a commonly discussed but rarely explained indicator.
00:43
💡
GDP Numbers Questioned
Highlights the unreliability of official Chinese GDP data, making the credit impulse a valuable alternative.
01:41
📊
Property Sector as Main Driver
Identifies the key borrowers behind credit growth, which is crucial for understanding the indicator's dynamics.
02:53
⚖️
Potential Divergence
Challenges the assumption that a falling credit impulse always signals economic weakness.
03:27Full Transcript
[00:00] It's a common conversation among traders and macroeconomists about the movements of the Chinese credit impulse and how this swings really dictates not only the future of China as banking system but the global economy.
[00:15] However, I really have not seen many people take the time to try to define what the Chinese credit impulse is and why it may not matter anymore.
[00:30] Alright, let's get started. When it comes to the Chinese credit impulse, it's actually pretty simple.
[00:43] It's an equation that calculates the growth in credit divided by the growth in GDP. So when credit growth, which means the net amount of new loans into the economy is growing
[00:56] faster than GDP then that means that the Chinese credit impulse is on an upswing and will move higher When the new lending is going at a pace slower than GDP growth then the Chinese credit impulse will
[01:16] fall the reason why economists care about this because it is heavily correlated to Chinese manufacturing and services PMI's which our survey data is
[01:28] showing the health of the manufacturing industry and the service economy in a given country's economy. And it's also a leading indicator for changes in the real growth of China
[01:41] because China's GDP numbers are questionable, and they kind of publish them more to serve political aims. They don't account for fluctuations in a cycle. They're usually pretty stable.
[01:53] So if you want to see them, the credit impulse may be a good proxy for that. It also because China is the second biggest economy in the world and is the biggest importer of raw materials to produce finished goods in the world it often leading in care for global growth particularly emerging market economic growth as a whole is heavily correlated to the Chinese credit impulse And the other thing that is pretty correlated is the Chinese stock market
[02:20] So why am I questioning its utility in the future then, if it's historically, at least for the past decade, been a good leading or coincident indicator for several different variables
[02:34] that market participants analyze? Well, it's because I think a lot of the reason I am more skeptical is because the main borrowers who are driving that new lending for the past decade have been property developers and or people getting mortgages for housing.
[02:53] And the Chinese government is making a priority to knock down housing prices, which would mean to reduce credit access as part of that. And so if the Chinese government is going to use stimulus it may be in a fashion that does not spark the Chinese credit impulse because of the less demand for property development and or a system designed to keep property prices down and less
[03:27] speculative lending in that sector. So you could see, say, maybe the Chinese economy do well, even if the credit impulse continues to trend lower or vice versa. And I noticed in the last
[03:40] year or so, ever since PIMCO did a good piece about the Chinese credit impulse, I think in 2020 that a lot of investors seem to care more about the Chinese credit impulse than the past and just when it becomes a more ubiquitous indicator
[03:55] ironically is when it may not matter as much. Let me know if you have any questions about this I'll put a link to some notes of citations related to the
[04:08] research on the Chinese credit impulse and where you find real-time data on it Good luck out there in the market. Like and subscribe if you like this channel. If you have any questions or comments or topic suggestions for future videos, please feel
[04:23] free to comment or email us at askafundmanager at gmail.com. Thank you.