China’s Slowing Credit Growth May Bring Back Deflation Concern

China’s credit growth is slowing. Can commodities continue to rise?

Domestic credit growth in China slowed in January to an annualized rate of 11.2%. That compares with 12.3% in December and a May 2020 peak of 13.5%. On the face of it, you might think, “So what? Credit growth is still clipping along at above 10% per annum so there shouldn’t be any concern over credit deflation.” That is true, for now. However, it’s the trend in the growth rate which is relevant to what is going on.

The so-called “credit impulse,” which is the change in the growth rate of aggregate credit as a percentage of gross domestic product, has been shown to lead China’s economic performance. With that credit impulse now in negative territory, it is predicting that China’s economy will slow through the course of the rest of the year. Were that to happen, with China being the world’s factory, it may cause increasing doubt to set in as to whether commodities, in particular, can continue their meteoric advance of the past year.

Indeed, there has been a relatively close historical relationship between China’s credit impulse and the rate-of-change in commodities. That’s relevant because, as the chart below shows, the CRB index has now reached a pivotal zone, consisting of the 2009 low and highs in 2016, 2017 and 2018.

There’s much talk at present of a new secular commodity bull market. That, in itself, is perhaps a reason to think that sentiment towards commodities is perhaps a little overextended on the bullish side at this juncture. Whilst the Elliott wave structure might be pointing to a significant low having been reached in commodities during 2020, any new bull market will not advance in a straight line. Given the slowdown in Chinese credit growth, the potential resistance on the CRB chart and the general excitement about all things commodity, we would not be surprised if the rally took a breather. If that turns into a significant decline, don’t be surprised if deflation fears arise.

Commodities CRB Index- March 2021