Earlier in the week, rumors swirled that China would release another flood of stimulus dollars. The market actually turned up, and commodity and infrastructure names such as Arch Coal
I, however, was feeling a bit more cautious on the idea of a follow-up stimulus injection.
First off, the rumor proved to be just that: A Chinese official announced that the government would wait to assess the existing stimulus package's impact before taking further steps. In other words, the door is still open, and contrary to the market's recent reaction, I view further domestic initiatives as a potential sign of trouble for the United States.
It's not exactly secret information that China is the largest holder of U.S. debt. Interestingly, early in February, JPMorgan Chase
In short, China may favor an investment in its own economy over support for its largest export market, the U.S. If such a dynamic were to play out, the dominoes could fall as follows:
- Demand for Treasuries weakens, driving up yields, and in turn, the U.S. government's borrowing costs.
- Private U.S. debt issuers are forced to compete by offering similarly high yields.
- Public and private borrowing activity slows as a whole, dragging down the U.S. economy from whatever state of relative health it happens to be registering at the time.
For investors who got into commodity names at high prices on the initial news of fresh Chinese stimulus spending, net global commodity demand could prove to be softer than expected as weakened U.S. and related economies offset the Chinese hunger for all things metal, coal, and oil.
I certainly don't pretend to know that this situation is any more likely to pan out than the perspective offered by JPMorgan Chase. However, I suggest that investors keep a fairly close eye on future developments.
More Foolish perspectives on China:
