BHP and Rio given a helping hand from China

BHP Billiton and Rio Tinto shares have been given a leg-up by better Chinese PMI figures and easier monetary policy.

Can’t anyone get their forecast on the China economy right?

If doom and gloom are the right words for an economy growing at more than 7% this year, yesterday’s increase in China’s Purchasing Managers Index to 50.3 in July from 50.1 in June was positively jaw-dropping.

Now, there are expectations that the Chinese government will cut its official interest rate so that it creates the financial conditions whereby its 7.5% growth forecast for the economy will be achieved. Already money market conditions through government liquidity injections are easing. The overnight repurchase rate was 3.6% compared with 12.85% on June 20. In the tug between those who want robust economic growth and those seeking a clamp down on the shadow banking system, those advocating economic growth have won.

That’s a bit of good news for the Australian mining stocks. Since June they have been stellar performers. BHP Billiton shares have gained 14% since June 25. Rio Tinto’s stock is up even further from the same date, 15%. Fortescue has added a whopping 26% to its share price since June 24. The Tianjin spot iron ore price, despite four consecutive days of losses, is up 17% since May 31. Yesterday it fell 20 US cents, or 0.2%, to $US129.70.

It’s likely that BHP Billiton and Rio Tinto may deliver some crumbs to the analyst community when they announce their upcoming earnings. BHP Billiton chief executive Andrew Mackenzie and his Rio Tinto counterpart Sam Walsh may assuage those who want further spending cuts by giving them what they want, albeit perhaps a rather modest decrease (see Robert Gottliebsen's Making BHP more like CBA and Tim Treadgold's Re-examining Rio). Moreover, Mackenzie and Walsh may signal their asset disposal sale process is on course. Such statements may be enough to underpin the stock prices of both companies and the resources sector in general.

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