Stocks and Bitcoin Face Fresh Headwind as China Gauge Turns Red

A closely watched measure of Chinese credit growth is flashing a warning for global risk assets, yet bitcoin has continued to climb, showing little reaction to the deterioration so far.

The latest reading marks a sharp change from April 2023, when bitcoin was trading near $30,000 and CoinDesk identified China’s improving credit impulse as a potential source of support for the cryptocurrency. The indicator is now moving in the opposite direction.

Economist Michael Biggs developed the credit impulse in 2008 as a way to track changes in the flow of new credit compared with an economy’s GDP. It does not simply measure outstanding debt. Instead, it captures whether the pace of new borrowing is increasing or decreasing relative to the size of the economy.

A rising reading generally points to faster credit creation, which can encourage spending and economic expansion. A falling reading indicates that the flow of new credit is slowing.

The indicator has historically had broader market implications. Societe Generale research shows that China’s credit impulse has a relationship with global manufacturing cycles and has led S&P 500 returns by about a year. Its direction can also affect commodities because China is a major consumer of raw materials and the world’s largest manufacturing hub.

China’s Liquidity Cycle Turns Lower

The latest decline is particularly relevant for bitcoin because BTC has historically been sensitive to global liquidity. Some major bitcoin market bottoms have occurred around periods when China’s credit impulse started to strengthen again.

Societe Generale has cautioned that the current deterioration could prove important. Albert Edwards has argued that investors could make a serious mistake by overlooking China’s recent monetary tightening. In his view, weaker credit creation relative to GDP could signal a broader global economic slowdown, with potential consequences for corporate earnings and U.S. stocks.

The Bloomberg China Credit Impulse index recently fell to 20.84, its lowest level since 2008, according to MacroMicro.

Bitcoin has nevertheless moved in the opposite direction. The cryptocurrency surged 25% in August, pushing above $80,000 as strong U.S. spot bitcoin ETF inflows, short covering and gains in previously underperforming assets helped drive the rally.

BTC has since struggled to maintain that level. Renewed expectations that the Federal Reserve could raise interest rates have weakened market sentiment and limited bitcoin’s follow-through.

Two Possible Outcomes

The market could be entering a period in which bitcoin becomes less sensitive to Chinese credit conditions. The cryptocurrency’s investor base has changed substantially since its early years, when retail traders in China and South Korea had a much larger influence on prices.

U.S. institutions and spot bitcoin ETFs now represent a far more important source of demand. That shift could allow BTC to withstand weaker Chinese liquidity for longer than it did in the past.

However, the second scenario would be more challenging.

If China’s slowing credit growth contributes to weakness in global markets, U.S. equities could eventually come under pressure. A broader retreat from risk assets could then spill into bitcoin, even if most current BTC demand comes from investors outside China.

The key question is whether bitcoin’s increasingly institutional market can remain insulated from China’s credit cycle or whether a broader global risk-off move will eventually pull the cryptocurrency lower as well.