The ‘Collapsing’ Credit Impulse And The Story That Matters

“Is the collapse in the global credit impulse going to extend cyclical revulsion?,” SocGen’s Albert Edwards wondered, in his latest weekly missive.

I’m not sure “revulsion” is the best way to describe the unwinding of outperformance for some popular reflation expressions, but it’s one way. And it’s certainly Albert-esque.

The question is a good one, no matter the terms you employ while asking it. There’s a (good) argument to be made that the answer hinges on both the character and scope of China’s efforts to put the brakes on the country’s burgeoning slowdown.

Edwards, you’re reminded, believes that over the long haul, his pseudo-famous “Ice Age” thesis will gradually (or suddenly, depending on how terrifying you think the world looks through MMT lenses) transition into a “Great Melt,” as monetary-fiscal partnerships and other manifestations of policy largesse push yields higher.

But that’s a story for later. Sometime between now and then, the world will witness “another major growth and deflation scare,” Edwards reiterated this week.

His latest leans heavily on a chart from Nordea, plotting the G3 credit impulse (on a 12-month lead) with the global manufacturing PMI. For the bank’s Andreas Steno Larsen, the figure (below) is the “chart of charts.”

My unswerving commitment to being totally honest with readers about my own views compels me to offer a quick aside. Steno Larsen’s analysis makes for good reading, but in my opinion, it’s best viewed as what I’ll call “informative, analytical entertainment.” That’s not meant to be derisive. It’s just to say that his work is chock-full of charts like the one shown above. They’re great charts. But great charts often tacitly suggest that markets (and the world in general) are simpler than they actually are. To be clear, Steno Larsen is a (very) capable analyst. But he’s even more capable when it comes to producing “Wow!” charts. Almost by definition, “Wow!” charts are oversimplifications.

In any event, macro watchers are compelled to fret over the ebb and flow of China’s credit cycle, because when the Chinese credit impulse turns negative — which it did earlier this year — it can signal inflection points. Edwards’s point in citing Steno Larsen’s “chart of charts” was simply to note that the global impulse has turned negative, which is “food for thought and suggests the reflation trade might unravel for awhile yet.”

Edwards wrote Thursday, but I waited a day to highlight his latest because China’s August credit data was due, and I figured the above would help contextualize it or otherwise enliven the numbers.

New yuan loans in August were 1.22 trillion yuan. That was near the bottom of the range from 29 economists. Consensus was looking for 1.4 trillion. Recall that July’s data was less than robust. Credit growth slowed more than expected that month, even accounting for the seasonal (red shaded area in the figure).

Total financing was 2.96 trillion yuan last month, ahead of estimates and up sharply from July (blue line in the figure), but M2 growth of 8.2% was below the 8.4% estimate and down from the previous month.

“The credit data is not very good,” Commerzbank’s Zhou Hao said, bluntly.

This comes at a critical juncture. There’s rampant speculation about when and how the PBoC will ease. July’s RRR cut seemed urgent, but there was no follow through on OMO rates or the LPR, which remained unchanged for a 16th consecutive month in August.

Beijing is no stranger to precarious juggling acts and tightrope walks, but the task at hand is unfathomably daunting. The deluge of daily headlines out of China is virtually impossible to summarize. Xi’s sweeping “common prosperity” initiative spawns dozens of stories every, single weekday. Then there’s the Evergrande saga. And Huarong. And surging factory-gate inflation. And the property crackdown. And the ongoing effort to strip away every vestige of democracy in Hong Kong. And the Taiwan tension. And the manmade, militarized islands. And so on, and so forth.

Just as the macro is tethered to the ebb and flow of China’s credit impulse, so too is the geopolitical narrative increasingly inseparable from Xi’s vision for an assertive, global China. Over the longer-term, that’s the story which really matters.


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One thought on “The ‘Collapsing’ Credit Impulse And The Story That Matters

  1. Xi isn’t just wading in the water. He’s trying to grasp and control multiple whales by holding their tails. Will not be an easy swim.

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