Credit impulse index vs. Manufacturing cycle


Weighed by the declining of the manufacturing cycle, China’s economic growth is expected to slow down in the second half of 2021. Credit impulse index helps investors identify the turn of an economy.

First of all, credit impulse was developed by economist Michael Biggs in 2009. Credit impulse measures the impact on an economy from increasing new credit loans. Bloomberg’s credit impulse index uses China’s increase of societal financing (including on-balance sheet credit loans, off-balance sheet financing, direct financing, and local governments' special-purpose bonds), divided by the average rolling sum of quarterly nominal GDP.

Credit impulse index = net increase of credit loans / nominal GDP

From economist’s point of view, an increase in credit loans suggests higher likelihood to consume/invest, so it serves as a leading indicator for economic growth. Increase in credit loans, rather than in the volume of credit loans, can reflect the credit cycle more accurately.

China’s credit impulse index is cyclical with each cycle lasting 3-5 years. When liquidity rises with loose monetary policy, demand for credit loans increases. As liquidity dries, new loans become less, and the economy slows down.

China’s economic growth is closely tied with its manufacturing activities. When manufacturing declines, copper-to-gold ratio falls back as demand for copper softens.

In the past, manufacturing cycle led credit cycle and both had high correlations. But their roles have switched due to the impacts from the Chinese government’s policies, and credit cycle shows signs of leading the manufacturing cycle.

Takeaway from MM

Manufacturing has started rising since mid-2020. Stock replenishment picked up pace as supply chain had been disrupted amid the pandemic. Demand for raw materials rose; copper-to-gold ratio rebounded as well.

In the third quarter last year, credit impulse index reached its peak and was leading the manufacturing cycle as china slowly normalized its monetary policy scheme.

Copper-to-gold ratio remains volatile. China, Taiwan, and the US submitted diverged PMI outlooks. Slowdown in China’s manufacturing is weighing down its economic growth, doubled by the downtrend of the credit cycle.

China’s manufacturing is likely to remain on decline until credit impulse rises and brings both manufacturing and credit cycle up.