New Chinese Stimulus Package will limit appetite for US Debt

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Reports out of the Far East and Europe suggest that China will announce a large stimulus package for its economy later this week. The result of this expectation has been a strong uptick in European stock markets which has flowed over to the US. There is a desperation for any good news in the current market climate.

It must however be understood that this package, if announced, will be directed specifically at the Chinese economy and while there may be some spin off, just as Americans pushed for a “buy America” campaign so will the Chinese push for a “buy China” campaign. The Chinese with their system of government are likely to be more successful.

The result is that any spin off from a China stimulus package is likely to be less than is hoped for.

A potentially bigger problem lurks later in the year when the US goes to market to fund its debt. With China having already used much of its resource to fund its own stimulus packages there is unlikely to be much appetite for US treasuries or other instruments. This could well trigger a significant fall in the value of the dollar and an increase in US inflation.

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