David Waring

As most of you have probably heard by now, yesterday China announced a $586 Billion stimulus package which initially sent the markets higher but led to a selloff later in the day as questions about the impact of the stimulus outside of China began to arise.

As reported here by Peter Cooper the first thing that it is important to understand is the sheer size of this package. While $586 Billion may not seem like a lot in comparison to the numbers being thrown around here in the US, when the packages are compared in terms of the smaller size of the Chinese economy, the Chinese package is much larger than what has been done so far here in the US.

The second thing that it is important to understand here, is that while the global selloff in commodities has hurt the profits of commodity producers it has added money into the pockets of consumers at a time when they desperately need it. As it seems that the Chinese package will be focused on stimulating domestic demand, this puts other countries in a situation where they could be paying more for commodities such as oil and not seeing much of the offsetting benifits.

Lastly and perhaps most importantly as Dirk Ehnts points out in his recent post Where Does the Money Come From? how the Cinese government comes up with the money to monetize this package will has the potential to have huge ramifications on the US Dollar. As the Chinese government owns over $1 Trillion in US Debt should they decide to sell off a big chunk of that to finance this new stimulus package, the impact on the US Dollar could be damaging.

Surprisingly enough although this potential issue has been widely reported, the US Dollar has not sold off as one would expect and one reason could be that the Stimulus package is actually not going to be as big as reported.

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Simit Patel

Just wanted to share a recent article I wrote for SeekingAlpha on this very same topic:

What China's Stimulus Means for Traders

China recently announced a stimulus package for its economy, promising 586 billion. This is a rather enormous stimulus package relative to the size of China's economy; John Browne says it would be analogous to a stimulus package of 3 trillion US dollars by the US government.

For the US dollar, this is a particularly ominous sign. This major expenditure on the part of the Chinese government will leave fewer funds available to purchase Treasury bonds -- just at the time when the US government is issuing more and more debt. Even potentially worse for the US dollar would be if China decided to sell its holdings of US treasuries to finance its stimulus package. Either way, the result is falling demand for US Treasuries while market supply is increasing, which would suggest a bear market in bonds.

As a result, China's stimulus package is a bearish sign for the US dollar and for US treasuries.

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