Bitcoin (BTC) Bulls, Beware: China's Stimulus May Have Lost Its Mojo

According to BCA Research, generating large bullish "credit impulses" is now a tough task for China.

China unveiled a raft of stimulus measures recently, the biggest since 2008, sparking a rally in Chinese stocks and risk assets worldwide, including bitcoin.

Most crypto analysts expect the Chinese stimulus and the Fed rate cuts to propel bitcoin (BTC) to $100,000 in the coming months.

However, BCA Research argues the risk-on rally may be short-lived as China’s latest stimulus falls short of generating large bullish “credit impulses” as it did in the past two decades, including in 2015.

Credit impulse refers to the flow of new credit issued through loans and other debt instruments as a percentage of gross domestic product (GDP). Since the 2008 crash, analysts have closely followed China’s credit impulse as a leading indicator of economic growth and risk-on rally worldwide. Fresh upswings in the indicator have historically coincided with bitcoin bear market bottoms.

The credit impulse peaked at 15.5 trillion yuan during the last major bullish easing cycle dated 2015, equating to 15% of the GDP. Back then, the Chinese stocks, represented by the CSI 300, more than doubled in six months and BTC found a bottom near $100, turning higher for a two-year bull run that peaked near $20,000 in December 2017.

Since then, China’s economy has doubled in terms of nominal GDP, which means the credit impulse during the current cycle needs to peak at 27 trillion yuan to have a similar bullish impact on the economy and markets.

“However, the most recent peak in the credit impulse was less than CNY5trn. So, to match the 2015 episode, the latest measures would need an amplitude five times greater than the most recent peak,” BCA Research stated in a client note on Oct. 2.

Reversing the downtrend in the credit impulse might be easier said than done because the factors that drove it higher initially, such as the housing market boom, are no longer present.

“Through 2000-2020, when China’s housing boom was in full swing, it was possible to channel the exponential credit curve into the housing and construction boom, But now, absent an alternative destination for the productive use of credit of the same magnitude, it will be difficult to generate those same monster credit impulses,” BCA's analysts noted.

The credit impulse dropped to a record low of 1.5 trillion yuan in the second quarter of 2022 as the government pursued a zero-COVID policy and a deleveraging campaign in the property sector. The credit impulse recovered to 4.8 trillion yuan in the third quarter, mainly due to a rebound in bank lending.

The recent stimulus measures, including infrastructure spending, tax cuts and subsidies for homebuyers, are expected to push the credit impulse to 6 trillion yuan in the fourth quarter, according to BCA.

“This is up from CNY4.8trn in Q3, but still well below the CNY15.5trn peak during the last major easing cycle, which began in 2015,” the analysts wrote, adding that the credit impulse would need to peak at 27 trillion yuan to have a similar impact on the economy as in 2015.

“This seems unlikely given the smaller role of credit in the Chinese economy today and the government’s desire to prevent another property bubble,” they noted.

The credit impulse is a measure of the flow of new credit issued through loans and other debt instruments as a percentage of gross domestic product (GDP). It is a key indicator of economic activity and financial conditions in China.

A high credit impulse typically indicates strong economic growth and a risk-on environment in financial markets. Conversely, a low credit impulse suggests weak economic activity and a flight to safety in markets.

Bitcoin has historically shown a positive correlation with the credit impulse, as traders and investors tend to flock to the cryptocurrency during periods of economic optimism and financial market rallies.

The credit impulse peaked at 15.5 trillion yuan during the last major easing cycle, which began in 2015. During this period, Chinese stocks, as represented by the CSI 300 index, more than doubled in six months and BTC found a bottom near $100, setting the stage for a two-year bull run that culminated in a peak price of nearly $20,000 in December 2017.

Since then, China’s economy has doubled in nominal GDP terms, which means that the credit impulse during the current cycle needs to peak at 27 trillion yuan to have a similar bullish impact on the economy and markets, according to BCA.

“This seems unlikely given the smaller role of credit in the Chinese economy today and the government’s desire to prevent another property bubble,” the analysts concluded.