In macroeconomics, the Chinese credit impulse is considered a leading economic indicator (some believe a 17-month lead) because it helps predict future economic activity not only in China but also across the globe. The credit impulse is the change in the flow of new credit issued (loans and other debt instruments) as a percentage of GDP. It serves as a measure of how much new credit is being created and injected into the economy, which can have a significant impact on growth and investments.
Domestic Economy Impact
As the world's second-largest economy, China plays a crucial role in the global economic landscape. The credit impulse in China can influence its domestic economic growth, as new credit helps finance investments, infrastructure projects, and consumption. When there's a strong credit impulse, businesses have more access to loans, which can lead to increased production, employment, and overall economic activity. Conversely, a weak credit impulse may signal a potential slowdown in the domestic economy.
Global Economic Impact
China is a significant importer of commodities and consumer goods. A strong Chinese credit impulse can result in increased demand for raw materials, intermediate goods, and finished products from other countries, boosting global trade and economic growth. When the Chinese credit impulse weakens, it may lead to reduced imports and a slowdown in global economic activity.
Commodities Impact
China's demand for commodities such as oil, metals, and agricultural products is closely tied to its credit impulse. A strong credit impulse may lead to higher commodity prices due to increased demand, benefiting commodity-exporting countries. On the other hand, a weak credit impulse can result in lower commodity prices, negatively affecting these countries' economies.
Financial Market Impact
The Chinese credit impulse can also affect financial markets worldwide. A strong credit impulse may lead to increased risk appetite among investors, driving up the prices of equities, bonds, and other financial assets. Conversely, a weak credit impulse may trigger a flight to safety, resulting in a sell-off in riskier assets and a rise in demand for safe-haven assets like government bonds and gold.
In summary, the Chinese credit impulse is a leading economic indicator because it provides insights into the future trajectory of both the Chinese and the global economy. By observing changes in the Chinese credit impulse, economists and policymakers can anticipate shifts in economic activity and implement measures to mitigate potential risks or capitalize on opportunities for growth.