Bitcoin is holding up despite a deterioration in a key Chinese liquidity indicator that has historically provided clues about the direction of global risk assets.

China’s credit impulse has recently moved into negative territory, raising concerns that weaker credit creation could eventually weigh on stocks, commodities and bitcoin. The signal stands in contrast to April 2023, when bitcoin was trading near $30,000 and improving Chinese credit conditions were cited as a potential boost for the cryptocurrency.

The credit impulse was developed by economist Michael Biggs in 2008. Rather than measuring the total amount of debt in an economy, it tracks the change in the flow of new credit relative to GDP. In other words, it shows whether fresh borrowing is accelerating or slowing compared with the size of the economy.

When the measure rises, faster credit creation can support spending and economic activity. A declining reading suggests that the flow of new financing is losing momentum.

The indicator has implications beyond China. Research from Societe Generale has linked changes in the credit impulse to global manufacturing cycles and found that it has historically led S&P 500 returns by about 12 months. A weaker reading can also pressure commodities, given China’s position as one of the world’s biggest commodity consumers and its role as a global manufacturing hub.

Liquidity Signal Weakens

Bitcoin’s history makes the latest move worth watching. BTC has often responded positively when China’s credit impulse begins to recover, and major market bottoms have coincided with renewed increases in the measure.

Societe Generale has warned that the current decline should not be dismissed. Economist Albert Edwards said overlooking China’s recent monetary tightening could become a major investment mistake. He has argued that slower credit creation relative to GDP could point to a broader global slowdown, potentially hurting corporate profits and U.S. equities.

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

Bitcoin, however, has continued to advance. BTC climbed 25% during August and moved above $80,000, helped by heavy inflows into U.S. spot bitcoin ETFs, short covering and a broader recovery among previously lagging assets.

The rally has since lost some momentum, with bitcoin remaining below the $80,000 mark as renewed expectations for a Federal Reserve rate hike weighed on sentiment.

Bitcoin’s Changing Market Structure

One possibility is that bitcoin can continue rising even as Chinese credit conditions deteriorate.

The cryptocurrency market is no longer dominated by the same investor base that influenced prices in its earlier years. U.S. institutional participation and spot ETF activity now play a much larger role, potentially making bitcoin less dependent on changes in Chinese domestic liquidity.

The alternative is that the weakness in China eventually spreads to global equities. If U.S. stocks come under pressure and investors broadly reduce exposure to risk assets, bitcoin could also face selling regardless of whether its buyers are based in the U.S., China or elsewhere.

For now, it remains unclear whether bitcoin’s changing market structure has reduced its exposure to China’s credit cycle or whether the impact of weaker Chinese liquidity has simply yet to reach the cryptocurrency market.