The Chinese Stimulus

The big news over the weekend was the $586 billion economic stimulus package to be spent on infrastructure, tax cuts and farming subsidies. I haven't anywhere seen published how the Chinese plan to pay for this. Will they spend some of their $1.9 trillion ($1900 billion) foreign reserves. There are three important issues here for the outside world:-

1. What effect will this stimulus have on commodity prices?
2. What business opportunities will be available to non-Chinese companies?
3. If this money is coming from China's USD reserves, they are presently invested, mostly in US Treasuries. Selling those is going to be very dollar-negative and the effect of the money in circulation is going to cause dollar inflation. It isn't clear to what extent.

Looking inside China, I think that we will see utter carnage in the export manufacturing sector. Factories will close, workers laid-off and decrease in spending on non-essential goods, tightening the grip. In the past, commentators (though not I), have generally agreed that the Far East, especially China, will continue to expand and that their economies will be the new 'engine' for the world economy. That is not going to happen. This has happened too early in China's emergence for them to go it alone and if anything China will be hit harder than other western economies.

Further to my previous posts, it seems that I was right that the Euro has bottomed and we are now seeing useful gains against the USD. There is little doubt that this was going to happen anyway but the Chinese package will speed it up. We could see quite a sharp bounce in EUR/USD and long EUR is probably a good call. Commodities priced in USD will also rise but the world demand for industrial commodities (metals, minerals, etc.) will fall. The price rise will be due to a devaluation in the USD - inflation. The effect of China spending its dollars would be inflationary.

I don't see that there will be much opportunity for outsiders to benefit from the Chinese stimulus. We wouldn't really expect it, either, as the plan is to stimulate the Chinese economy, not the western world's.

In summary, stocks rising on the back of the Chinese announcement seems illogical. When the penny drops, they will go back down again. Gold is making some serious gains right now. Keep that in mind as a fear indicator. We are still not out of the woods in the banking sector and a major collapse is still a possibility. Indeed the actions being taken by governments last weeks suggest a greater level of panic than at any time up to this stage and you can be sure that governments will know long before the rest of us.

The massive 1.5% cut by the Bank of England last week was very significant.

I don't enjoy posting gloomy news and views but then again please understand that I am not responsible for the present circumstances. Don't shoot the messenger.