Mining stocks revive as China may be looking to stimulate economy

Global top 40 mining and oil stocks gain USD 100bn in value on Wednesday, on speculation that China could announce stimulus measures.

JOHANNESBURG  - 

The Shanghai Composite index rocketed by 7.6% on Wednesday, on speculation that the Chinese government would introduce measures to protect the country's economic growth, as the global economy continues to cool. Amid the speculation, investment bankers JP Morgan crystallized the idea that the Chinese government was considering stimulus spending of as much as CNY 400bn (about USD 58bn), and may also ease monetary policy this year.

Resources stocks reacted positively; Shenhua, the gigantic Chinese coal miner, recorded a one-day gain of nearly 9% in its stock price. Gold miner Zijin jumped by 10%. The positive sentiment spread to other markets, with emphasis on value seeking after the huge sell off of resources stocks starting in mid-May, and accelerating especially hard from mid-July as the euro's value hit a blow off against the dollar. Since then, crude oil prices have tumbled by 20% and more, dragging practically all other commodities down as well.

Over the past while, the world's top 40 mining and oil stocks have lost a combined USD 1.7 trillion in value, but clawed back just over USD 100bn of that during trade on Wednesday. In Australia, BHP Billiton, the world's biggest diversified resources stock, rose nearly 5% on the day, as did its intended takeover target, Rio Tinto. The two stocks were later to gain up to 7% and more in London trading. The gains held even after the dollar turned stronger in afternoon New York trade, forcing down crude oil prices by USD 4 a barrel, and triggering sharp reversals in most other traded commodity prices.

While the economic cooling in the US, as spread to the UK and Western Europe, is well known by now, the direction of the Chinese economy, the single biggest consumer of raw materials in the world, is less certain. A number of Asian stock markets have, moreover, experienced bubble blow offs in the recent past; even after Wednesday's sharp recovery, the Shanghai Composite Index remained 59% off its highs.

In a recently published report, the Bank Credit Analyst argues that while growth moderation in China will persist, "it will be gradual with limited downside". Olympics-related capital spending - estimated at a record USD 43bn - is seen as "only a fraction of China's total capital spending and a relatively small portion of its USD 3.6 trillion economy".

BCA Research also found that Chinese authorities "are being proactive and have already shifted their focus to protecting growth, even though signs of the slowdown are still very preliminary and headline inflation remains above their target. So far, domestic demand is holding up well: retail sales volumes continue to accelerate and the softening in food inflation over the past several months is helping to alleviate a meaningful drag for lower-income households.

"Although it is still too early to expect a rebound in China's export sector (the weakest link in the economy), the slowdown may already be well advanced". The Chinese government has started to increase its tax rebates to exporters of some low-value-added industries, which should help stabilize their overseas sales, and additional fiscal support is expected if excessive weakness in these sectors persists.

The bottom line for BCA Research is that it expects "a further moderation in China's economic growth but maintain a positive outlook. The two primary risks that we are monitoring are the ongoing shortage of electricity and the rebound in the dollar".

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