Divergence in U.S.-China Credit Impulses: Growth Still Favored but Confidence Wanes

Overview

This is a China quantitative strategy brief issued by J.P. Morgan’s Asia-Pacific quantitative strategy team, focusing on using U.S.-China credit impulse data to gauge the direction of growth-versus-value style rotation. Based on first-quarter 2026 U.S. flow-of-funds data and May China social financing data, the report concludes “still biased toward growth but with waning confidence.”

Core views

The report’s core logic hinges on the relationship between credit impulse and the growth–value spread. The team interprets credit impulse as a proxy for the ‘risk component’ of the discount rate, with growth stock valuations highly sensitive to this factor. The latest data show a clear divergence: U.S. private-sector credit creation continues to accelerate, pushing the credit impulse from +1.6 percentage points to +2.5 percentage points; meanwhile, China has slowed for the third consecutive month, with May social financing bringing the credit impulse down to -0.4 percentage points. After offsetting these two, the composite signal still points to overweighting growth stocks, but it now only slightly exceeds the six-month moving average, with signal strength having weakened markedly compared to three months ago. Historical backtests show that, since A-shares were included in the MSCI in 2018, this U.S.–China average credit impulse signal has correctly predicted growth-vs-value rotation 53% of the time, generating annualized excess returns of +9.9%. The current signal remains in the ‘OW Growth’ range but is nearing the threshold.

Analysis framework

The research methodology can be summarized as a ‘macro factor–style mapping’ framework: First, the team constructs credit impulse indicators for both the U.S. and China. For the U.S., they use Federal Reserve flow-of-funds data; for China, they rely on central bank social financing (TSF) data. Credit impulse is typically defined as the deviation of credit growth from its long-term trend, or the change in new credit as a share of GDP, capturing marginal shifts in the credit cycle. Second, they take a simple average of the two countries’ credit impulses to derive a composite signal. This signal is used to forecast the relative outperformance of growth stocks versus value stocks within the MSCI China Index. Finally, historical backtesting validates the signal’s effectiveness, with a six-month moving average serving as a secondary reference to assess current signal confidence. When the composite signal exceeds its recent average and remains in positive territory, the system systematically tilts toward growth; otherwise, it shifts to value.

Methodology notes

• Quantitative/Factor/Portfolio TheoryMulti-factor model

  Macro Factor Mapping in Style Factor Rotation

  The report maps macro variables (credit impulse) onto forecasts of relative outperformance for style factors (growth vs. value). This is a typical macro–quant hybrid approach: credit impulse serves as a leading macro indicator to predict relative strength among market styles, rather than absolute returns. The underlying assumption is that changes in the macro liquidity environment systematically affect the risk premiums of different style factors.

• Macroeconomic frameworkCredit/debt cycle

  Credit Impulse as a Leading Indicator of the Credit Cycle

  Credit impulse measures the second-order change in credit growth (the rate of change), not the growth rate itself. It typically leads economic activity by about 6–12 months, as marginal shifts in credit expansion or contraction first affect firms’ and households’ financing conditions before spilling over into investment and consumption. In this study, it is further used as a proxy for the discount rate risk component—when credit impulse rises, perceived improvements in the financing environment lower risk premiums, favoring longer-duration, discount-rate-sensitive growth stocks.

• Quantitative/Factor/Portfolio TheoryBeta/alpha analysis

  Growth Stocks’ Discount-Rate Sensitivity (High-Beta Characteristics)

  Due to their high proportion of future cash flows, growth stocks are more sensitive to changes in the discount rate, effectively exhibiting higher ‘duration’ or beta in their exposure to macro factors. When credit impulse rises and the risk component declines, growth stocks enjoy greater valuation upside; conversely, they come under pressure. This mechanism is key to understanding why credit impulse consistently correlates with the growth–value spread.

Key data

• U.S. Credit Impulse (1Q26)+2.5 percentage pointsUp from +1.6 percentage points, reflecting accelerating private-sector credit creation
• China Credit Impulse (May)-0.4 percentage pointsSlowed for the third consecutive month, turning the credit impulse negative
• Signal Historical Backtest Hit Rate53%Accuracy in predicting growth-vs-value rotation since A-shares joined the MSCI in 2018
• Signal Historical Annualized Excess Returns+9.9%Performance of the growth-vs-value strategy based on the U.S.–China average credit impulse signal

Impact & implications

The report argues that the current divergence in U.S.–China credit impulses suggests weakening macro drivers of style rotation. While U.S. credit expansion provides a tailwind for growth stocks, China’s credit contraction acts as a headwind, leaving the composite signal in a state of ‘directional but low-confidence.’ For investors allocating to the Chinese market, this implies that growth still holds a relative advantage, but they should remain vigilant for further signal weakening or even reversal, particularly if China’s credit contraction persists or U.S. credit expansion peaks and reverses.

What to watch

• Whether subsequent quarterly U.S. private-sector credit data maintain the expansionary trend
• Whether China’s social financing growth stabilizes and rebounds, reversing the downward trajectory of the credit impulse
• How the composite credit impulse signal relates to the six-month moving average