Given China’s dominance as the world's largest producer and exporter of manufactured goods, changes in business conditions and credit growth in the country are closely linked to the global manufacturing cycle. For this week’s spotlight, we discuss how the China Credit Impulse Index can serve as a leading indicator of the global manufacturing cycle.

China Credit Impulse Index vs. Manufacturing Cycle

Credit issuance is closely related to economic activity. An increase in demand for new credit signifies heightened willingness to borrow for consumption and investment. Thus, credit impulse can serve as a leading indicator of economic conditions.

In China’s case, the China Credit Impulse Index exhibits a clear cyclical pattern spanning 3-3.5 years. When monetary policy is loose and liquidity is ample in the market, increased credit demand drives economic growth. However, when policy tightens in response to signs of the economy overheating, new credit issued declines with tightened liquidity, steering the economy to cool and trend downwards.

And since China is the largest upstream producer in global manufacturing, the China Credit Impulse Index has historically led the global manufacturing cycle by around two quarters. That is, booming credit growth reflected in a rebound in the credit impulse index suggests an impending upturn in the global manufacturing sector. Conversely, when the credit impulse declines, it means the global manufacturing cycle may be entering a downturn soon.

MM Takeaways

Against the backdrop of a gradual recovery in demand, the manufacturing sector bottomed in 2023 and began to bounce back, but the pace of recovery has been uneven, with the US and Taiwan experiencing faster growth, and Europe and China taking a little more time to catch up.

As the chart shows, given continued weakness in investor and consumer confidence, the China Credit Impulse Index is still consolidating at low levels. Looking ahead, as the PBoC continues to keep monetary policy accommodative, if credit growth can pick up in China, we might see the ongoing recovery in the global manufacturing sector bolstered with momentum.

Bonus: Toolbox Pointers

This chart is created using MacroMicro's Toolbox. For analyzing leading-lagging relationship, you can find the “Lead/Lag (n)” feature under the “Operation” dropdown for selected indicators, which allows you to shift data forward (or backward) by your specified period. For example, setting the n value to 6 shifts the China Credit Impulse Index forward by six months ahead.
For more handy features and how-to, check out the tutorial article here: Beginner's Tutorial: How to Use the MacroMicro Toolbox?

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