Just over a month ago - in what seemed to be an effort to keep the dream of a global synchronous recovery narrative alive - Morgan Stanley attempted to show that the link between China's (declining) credit impulse and the global economy (which we are constantly told is ebullient) has now been severed and all is well in the world.
Their Chief Asia Economist Chetan Ahya began by confirming that "if you had been able to reliably pick the key global macro variable over 2012-16, China’s credit impulse would have been your choice" and explains why (this should be obvious to regular readers):
The incredibly tight link between the credit impulse and China’s growth cycle, emerging markets (EMs) exports, global growth and commodity prices meant that it would have accurately predicted the direction of almost all other global macro variables that mattered, with about six months’ lead time.
He further explains the "simple" - in retrospect of course - reason behind this observation:
China’s credit impulse – or its leverage cycle – was the only game in town back then. With global aggregate demand weak as developed markets (DMs) were deleveraging and EMs were adjusting, the change in China’s credit impulse was the most significant driver of the global economy
However, in a striking claim which breaks with precedent and which, if correct suggests a historic change in the relationship between China's credit creation and its impact on global markets and economies, the Morgan Stanley economist then writes that the link between China's credit impulse and the global economy "has now been broken" and justifies his answer as follows:
China’s tightening has not had a material impact on the growth cycle either in China or globally, even though its credit impulse began to weaken about 24 months ago. As deleveraging and adjustment headwinds recede, the recoveries in domestic demand in both DMs and EMs have emerged as additional global growth engines.
Ahya used the following chart to prove his thesis...
However, Goldman Sachs disagrees, warning that things are aboutto get a lot more problematic for that global synchronous recovery narrative as China's collapsing credit impulse wriggles its way thru the economy...
Since 2008, there have been two and half distinct cycles in China credit. We see these cycles more clearly in the chart below, which plots net credit ows from lenders to borrowers against nominal IP growth in China.
Lower net credit ows from lenders to borrowers weigh on future activity growth
We can visually see how peaks/troughs in net credit ows from lenders to borrowers tend to systematically predict growth outperformance/ underperformance over a short period of time, but then growth underperformance/ outperformance over a longer horizon. For example, the peak in net credit ows from lenders to borrowers in late...