This will not end well…
In the past few months we have extensively covered the end of China’s credit impulse…
As the following chart from Goldman demonstrates, it has been China where policy uncertainty has stealthily exploded in the past three months according to policyuncertainty.com, while making virtually no new headlines.
Here is the visual confirmation of where the global reflation trade has « come » from:
The chart below shows the amount of credit created as a percentage of GDP during the five years prior to major downturns globally.
As a result: whereas back in Jan ’16 the global credit impulse was positive to the tune of 3.8% of global GDP (of which China comprised 3.5% of global GDP) it has now fallen back to -0.1% of global GDP (China’s contribution is -0.3% of global GDP) .
Net / net, “inflation” remains the most critical driver of cross-asset pricing—so if ‘price is news’ and inflation is preparing to fade further (without any seeming ‘US fiscal policy’ booster shot coming near- to medium- term) , be ready for negative impact on risk-assets.
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But now, as Citi writes, some market commentators in recent weeks have highlighted that perhaps there is a major risk that consensus opinion is again overlooking the influence of China’s credit cycles, and thus perhaps overstating the potential contribution of future Chinese demand growth to the global outlook.
