China’s credit impulse, arguably one of the most important drivers of commodity prices, has turned down sharply over the past few months. This could present a significant headwind to further price gains for metals such as copper which have had a strong run over the past twelve months.
Remember, the credit impulse is defined as the change in new credit issued (the flow of credit) as a percentage of GDP. The indicator was developed by Deutsche Bank economist Michael Biggs who argued that the most important credit variable in terms of forecasting GDP growth is the change in the flow of credit, not the change in the stock of credit.
It takes time for newly issued credit to find its way into the real economy – usually longer than one month and shorter than a year; the 6 month credit impulse appears to have the best track record as a leading indicator for GDP for most economies.
Total bank credits provide a pretty comprehensive proxy for the credit impulse in most developed countries. But in some countries, such as China, shadow banking (financial activity that takes place outside of the traditional banking regulations and systems) plays a significant role in new credit issuance.
That last fact means you need to take this particular indicator with a degree of caution. China’s credit impulse indicates that the wind has, or is close to turning against further strong commodity price gains. Not necessarily outright price falls, just less to fuel in the tank to support further gains.
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