Credit impulse: The “crystal ball” for investing in China

Amid a slew of economic data flowing into the financial news every day – not so much informative as it is confusing for their audience about where global economies are headed – we’d like to share with you in today’s article what economic data points carry more weight than the others.

What’s also important is that economies and stock markets are constantly changing – data that no one paid attention to yesterday may no longer be trivial today. When we spoke of the imminent return of inflation in October 2020, many in the market were eager to brush it off. But now, inflation is on the lips of almost every investor.

The issue with economic data is the time lag, yet stock markets are traded, to a certain extent, on expectations. By the time the statistics office announces data that points to a robust economic recovery, the stock market will have already priced it in two months earlier. In that sense, not all economic data is created equal, so indicators that are forward-looking are those that warrant closer examination.

How a stock market performs mainly depends on the economy’s growth rate and the amount of capital circulating in it, but the latter is generally considered more important than the rate at which the economy is expanding. While the main driver of long-term economic growth should be sustained by improving the production efficiency of economic activities, if we are to supercharge a recovery over a short time span, the only option available to boost growth will be injecting capital to stimulate consumption and investment. As such, the abundance of capital is often a better economic indicator than the GDP growth rate is.

In a deep and mature market such as the US, the Federal Reserve could easily regulate liquidity conditions by adjusting the federal funds rate before the global financial crisis (GFC) in 2008. But even after the GFC hit, where the federal funds rate was close to 0%, the central bank could buy bonds to calibrate the amount of money circulating in the economy.

But China, as an emerging economy, and unlike the US, in which one or two economic indicators would suffice to reflect comprehensive enough a picture of the economy’s capital conditions, requires more policy tools at its disposal to regulate and fine-tune its market’s liquidity conditions. The People’s Bank of China, helpfully, publishes monthly statistics on aggregate financing in the real economy, allowing investors to get a better grasp of how much capital there was in the market in their analyses.

Aggregate financing in the real economy indicates the amount of capital that flows into the real economy from the financial system, shadow banking included, within a specific time frame. When the growth of aggregate financing in the real economy outpaces that of the GDP, it means that the financial system has put more money into the economy than needed, and that the excess is likely to flow into the property or stock markets, stimulating assets valuations.

Moreover, credit impulse – which measures the gap between net credit growth and GDP growth – can perhaps serve as a crystal ball that tells us just where the mainland economy is headed.

Historically, when credit impulse rose, both Chinese property and stock markets would also benefit, and vice versa. Since mid last year, capital growth in China has been slower than that of the economy, which explains partially why some mainland companies have been plagued by a dearth of capital available in the market, giving rise to late payment risks.

But the good news is that mainland credit impulse appears to have stabilised since September/November last year. While it is still in negative territory, the downward trend has come to a halt. With the Chinese government also slowly injecting liquidity into the market, we expect its credit impulse to start showing signs of improvement. But in terms of how much it will improve, it is going to be in this year’s monetary policy that the decision lies.


This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.

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