China’s Risk Signal Turns Bearish for Stocks and Bitcoin

China’s credit impulse has shifted from a potential tailwind into a warning signal for risk assets, although bitcoin has so far shown little reaction.

In April 2023, when bitcoin was trading around $30,000, CoinDesk highlighted China’s credit impulse as a supportive factor for risk assets, including BTC. The latest readings point in the opposite direction.

Developed by economist Michael Biggs in 2008, the credit impulse tracks changes in the flow of new lending relative to a country’s gross domestic product. GDP measures the total value of final goods and services produced within an economy over a given period.

Rather than measuring the overall amount of debt outstanding, the indicator focuses on whether the rate of new borrowing is increasing or slowing compared with the size of the economy. An expanding credit impulse generally indicates that credit is entering the economy at a faster pace, potentially supporting consumption and economic growth. A declining reading indicates that the flow of new credit is losing momentum.

The indicator has historically been linked to global manufacturing activity and, according to Societe Generale research, has led S&P 500 returns by about 12 months. Its decline can also be negative for commodities because China is both a major consumer of raw materials and a central hub for global manufacturing.

Bitcoin Faces a Different Credit Signal

Bitcoin is not necessarily insulated from changes in global liquidity. As a liquidity-sensitive asset, BTC has historically seen major market bottoms coincide with recoveries in China’s credit impulse.

Societe Generale’s latest data shows the indicator moving lower, raising concerns that investors could be underestimating the implications for broader risk markets.

“China’s recent monetary tightening” could ultimately prove highly consequential for investors, Societe Generale strategist Albert Edwards said in a note addressing the weakening credit impulse.

Edwards argued that slower credit creation relative to China’s GDP could signal a broader global economic slowdown. Such a downturn could pressure corporate profits and, in turn, weigh on U.S. equities.

Bitcoin Has Yet to Respond

The Bloomberg China Credit Impulse index recently stood at 20.84 points, its lowest level since 2008, according to MacroMicro data. Bitcoin, however, has moved in the opposite direction, gaining 25% in August and briefly climbing above $80,000.

Several factors supported that rally, including substantial inflows into U.S.-listed spot bitcoin ETFs, the closing of bearish short positions and a broader recovery in assets that had lagged equities earlier in the year.

The rally has since lost momentum below $80,000 as renewed expectations of a Federal Reserve rate hike have weighed on investor sentiment.

Bitcoin could now follow one of two paths. It may continue rising despite the deterioration in China’s credit impulse. That outcome would not necessarily be surprising because the structure of the crypto market has changed significantly.

U.S. institutional investors and ETF flows now play a much larger role in bitcoin trading than the Chinese and South Korean retail activity that had a greater influence during the market’s earlier years. As a result, BTC may be less responsive to indicators tied specifically to China’s domestic credit conditions.

The alternative is more concerning for bitcoin bulls.

If U.S. stocks begin to weaken in line with the warning implied by China’s credit data, a broader shift away from risk could eventually spread into bitcoin as well. The location of BTC buyers may matter less if global investors collectively reduce exposure to risk assets.

For now, it remains unclear whether bitcoin can continue to ignore China’s weakening credit impulse or whether the signal eventually catches up with the cryptocurrency.

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