A Tale of Two Packages–and Two Stock Markets

In both the United States and China, the stock markets reached their 2008 lows in November. The Dow Jones Industrial Average (DJIA) fell to 7,552 on November 20, while the Shanghai Composite Index reached its bottom several weeks earlier on November 4, closing at 1,706.

From there, the relative performance of the two stock markets has been substantially different. After rallying by almost 20 percent to 9,034 on January 2, the DJIA has plunged to levels not seen since 1996. On Tuesday, the DJIA closed at 6,763, down 10 percent from its November low and more than 25 percent from where it started the new year.

In China, on the other hand, the Shanghai Index rallied by 40 percent from November 4 to 2,389 on February 16. Although it has given up some of those gains, closing at 2,198 today, it is still trading 29 percent higher than it was in November.

Of course, there are many factors that impact stock market performance, and the underlying problems of the financial services industry are very severe in the United States compared to China. The continuing saga of AIG, which reported a record $61.7 billion loss for the 2008 fourth quarter and will now require at least another $30 billion of funds from the government on top of the $150 billion committed last year, as well as the questions surrounding Citicorp and Bank of America and talk of nationalization, are weighing heavily on the equity markets. China’s financial sector has escaped these sorts of issues.

However, the difference in the way the two countries have chosen to revitalize their respective economies may also help explain why stock market performance has diverged so greatly. China announced a 4 trillion yuan ($586 billion) stimulus package in November, while the United States Congress approved a $787 billion stimulus program in February. While both packages have the same objective, they couldn’t be more different in makeup.

In a research report prepared by Jing Ulrich, managing director and chairman of China Equities at J.P. Morgan, Jing presented a breakdown of China’s stimulus package. As Jing demonstrates, investments in transportation infrastructure, the power grid and post-earthquake reconstruction account for the lion’s share of China’s planned spending. Specifically, investments in railways, highways, airports and power grids account for 45 percent of the 4 trillion yuan, while post-disaster reconstruction accounts for 25 percent. The remaining 30 percent is allocated as follows: rural development and infrastructure projects, 9.3 percent; ecology and environment, 8.8 percent; affordable housing, 7.0 percent; independent innovation, 4.0 percent; and health, culture and education, 1.0 percent. (Separately, China announced an additional 850 billion yuan ($124 billion) just for health care in February.)

Compare China’s package to that of the United States. Of the $787 billion authorized by Congress, only $111 billion, or 14.1 percent, is allocated to infrastructure and science. (Of the $89.2 billion allocated just for infrastructure, a mere $45.2 billion is provided for core investments such as roads, bridges and railways.) The biggest allocations in the U.S package are for tax cuts, $288 billion or 36.5 percent, and state and local fiscal relief, $144 billion or 18.2 percent. The balance is accounted for by funds for: protecting the vulnerable, $81 billion or 10.2 percent; health care, $59 billion or 7.4 percent; education and training, $53 billion or 6.7 percent; and energy and other, $51 billion or 6.4 percent.

In other words, the bulk of the planned spending by China is represented by investments that promise to improve the country’s overall productivity in the future, while the bulk of the spending by the United States is merely a transfer of wealth from one part of the economy to another.

Maybe the stock markets are telling us something?

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