Chinese GDP and Inflation Key to Success of BHP Billiton, Rio Tinto

What will we learn about the future this week? Oil looks set to finally break $US100, although you can blame the falling US dollar more than the rising oil price. According to OPEC’s own data, the oil price rose 9% in September in US dollar terms while rising 6% against a basket of currencies. More on oil in a moment.

Data geeks should keep an eye out for the Reserve Bank’s Statement on Monetary Policy, due out today. Not that we expect anything earth-shattering. But the Bank may give investors a clue about its expectations for inflation and thus, the need (and seeming inevitability) of another rate rise.

The last Statement on Monetary Policy (in August) did have one graph that caught our eye (belatedly). You’ll find it below. It shows Chinese GDP growth and price inflation.


China’s official inflation figure is muted. The huge flows of export cash into stocks and real estate mute the growth of consumer price inflation. Still, Bloomberg reports that “China ordered banks to put aside more reserves for the ninth time this year to cool an economy that expanded 11.5 percent in the third quarter and to damp speculation in stocks and real estate.”

Here’s an arcane but important statistic from China: “Fixed-asset investment in urban areas climbed 26.4 percent in the first nine months from a year earlier, up from the 24.5 percent pace in all of 2006. Industrial production jumped 18.9 percent in September, the biggest gain in three months.”

We mention fixed-asset investment not because it is fun to delve into the particulars of China’s macro-economic investment trends. Fixed asset investment is worth looking at because how China grows directly affects the future of BHP (ASX:BHP) and Rio Tinto (ASX:RIO).

Thus, whether China can continue to grow with high rates of steel-intensive fixed asset investment and with a large dependency on crude oil (see below) bears directly on the future earnings prospects of Aussie firms. Should BHP commit billions in shareholder cash on the premise that China’s growth will continue unabated?

We’re glad we don’t have to make that decision. But BHP does have to do something with its cash, doesn’t it? And unless it wants to become a hedge fund, buying another resource company may be the best thing for shareholders. 

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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Coffee Addict

…. key to the success of BHP Billiton, Rio Tinto and the Australian economy over the next 5 to 10 years.

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