Back in early April 2023, when bitcoin traded near $30,000, CoinDesk flagged China's credit impulse as a bullish tailwind for risk assets, including bitcoin $BTC$77,495.83.
The same indicator is now telling a different story.
Credit impulse, invented by economist Michael Biggs in 2008, measures the change in the flow of new credit relative to gross domestic product. The latter is the record of all final goods and services produced in a country during a specific period.
In simple terms, the indicator measures whether the pace of new borrowing in an economy is speeding up or slowing down, relative to the size of that economy, rather than just tracking the total stock of debt outstanding. A rising credit impulse means fresh credit is flowing in faster than before, which tends to boost spending and growth. A falling one.
The index is said to correlate with global manufacturing cycles and lead S&P 500 returns by 12 months, according to research by Societe Generale. The decline also sends a negative signal for commodity prices, given that China is one of the largest consumers of commodities and the factory to the world.
Bitcoin, being a liquidity sponge, is not uncorrelated either. Historically, major bottoms in bitcoin have coincided with renewed upswings in the credit impulse.
The indicator is now falling, according to Societe Generale, and ignoring that could prove costly for risk assets.
"Ignoring China's recent monetary tightening could prove to be the biggest investment mistake of the decade," Societe Generale strategist Albert Edwards said in a note discussing the decline in credit impulse.
He explained that a decline in credit creation relative to GDP in China could be a sign of an impending global slowdown, which could weigh on corporate earnings and U.S. stock prices.
Resilient $BTC?
The raw reading for the Bloomberg China Credit Impulse index stood at 20.84 points recently, the lowest since 2008, according to data source MacroMicro. Yet bitcoin surged 25% in August and topped $80,000.
The rally was characterized by strong inflows into U.S.-listed spot ETFs, an unwinding of short positions, and a broader uptrend in assets that had lagged stocks earlier this year. More recently, the ascent has stalled just under $80,000, with renewed fears of a Fed rate hike weighing on sentiment.
Two scenarios
From here, two scenarios seem plausible. In the first, bitcoin continues to climb, shrugging off the weakening China credit impulse. That wouldn't be entirely surprising given how the market's composition has changed. Crypto trading today is driven largely by U.S. institutional flows rather than the Chinese and South Korean retail volumes that once set the tone in the asset's early years,. This might make bitcoin less sensitive to signals rooted in China's domestic credit conditions.