Credit impulse still supports growth over value, but the advantage is narrowing

Overview

This report is J.P. Morgan's China quantitative strategy research, focusing on the signaling significance of China-US credit impulse for the relative performance of growth style versus value style in the Chinese equity market. The report argues that credit impulse can serve as a proxy for the risk component in the discount rate, and growth stock valuations are highly sensitive to this variable. The current average China-US credit impulse still supports growth over value, but its marginal strength has weakened.

Core views

The core view of the report is: after improved US credit data and weaker Chinese credit data offset each other, the composite credit impulse is still rising, but only slightly above its 6-month average. Therefore, growth can still maintain an overweight position relative to value, although the signal strength and certainty are lower than three months ago.

Analysis framework

The analytical approach combines the US Fed 1Q26 Z.1 flow of funds data with China's PBOC May TSF data to construct a China-US credit impulse indicator, and uses this indicator to determine the style allocation direction of growth versus value.

Methodology notes

• Macro quantitativeAverage China-US credit impulse signal

  Credit impulse as a proxy variable for the risk component of the discount rate

  The report treats credit impulse as a key macro variable affecting growth stock valuations; improving credit expansion is usually favorable for growth relative to value, but when Chinese credit slows and the composite indicator approaches its average, signal strength declines.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China growth style/growth stocks

  Maintain overweight relative to value style

  Strengths

  The composite credit impulse signal remains positive, and growth stocks are more sensitive to improvement in the risk component of the discount rate.

  Weaknesses

  The signal is only slightly above the 6-month average, and confidence has declined versus three months ago.

  Comparison

  It still outperforms value style on a relative basis, but the lead has narrowed.

  Risks

  If China's TSF continues to slow or US credit improvement stalls, the overweight signal for growth over value may weaken further.

• China value style/value stocks

  Underweight direction as the relative comparison benchmark

  Strengths

  If the credit impulse falls back or risk appetite weakens, value style may become relatively more defensive.

  Weaknesses

  The current quantitative signal still does not support value outperforming growth.

  Comparison

  Under this report's framework, value style is less attractive than growth style.

  Risks

  If the growth signal fails or the macro credit environment weakens, value style may regain leadership.

Key data

• US credit impulse+2.5 percentage pointsUp from the previous +1.6 percentage points, reflecting continued strengthening in US private-sector credit creation.
• China credit impulse-0.4 percentage pointsAfter TSF slowed for a third consecutive month in May, the credit impulse weakened.
• Backtest hit rate of growth versus value53%Based on the simple average China-US credit impulse signal since 2018.
• Annualized backtest return of growth versus value+9.9%The report discloses the backtest performance of this signal since 2018.
• Position of the composite credit impulseOnly slightly above the 6-month averageThis indicates the signal is still somewhat positive, but the marginal advantage is limited.

Impact & implications

The implication for asset allocation is that growth style can still receive an allocation tilt relative to value style, but that tilt should be more cautious because weakness in China's credit cycle is eroding the positive signal from improving US credit.

Risks

• The continued slowdown in China's TSF may keep dragging down China's credit impulse.
• The composite China-US credit impulse is only slightly above the 6-month average, so the positive signal is marginally weak.
• The backtest hit rate is 53%, indicating the model signal is not a high-certainty forecast.
• If US private-sector credit creation declines, the current overweight-growth view may be weakened.

What to watch

• Whether subsequent monthly PBOC TSF data stabilizes and rebounds.
• Whether subsequent Fed Z.1 flow of funds data continues to show expansion in US private-sector credit.
• Changes in the position of the average China-US credit impulse relative to its 6-month average.
• The actual performance of growth style versus value style in the China market.
• Whether changes in the credit environment cause the overweight-growth signal to be downgraded or reversed.