china development fuel demand

China development to fuel demand

David Uren, Economics correspondent November 13, 2007

THE China boom will keep powering the Australian economy in the years ahead, despite the financial storm still gathering in the US.

The Reserve Bank says China's growth will be shaved marginally by 0.5 per cent to 10 per cent next year because of the effect of financial turmoil on credit markets worldwide.

However, it says China's development, which has brought investment growth rates of 19 per cent over the past five years, still has a long way to run.

"This investment has been both a consequence of, and a reason for the rapid increase in urbanisation in China."

It says China's urban population has risen from 30 per cent to 44 per cent over the past decade.

"Given ongoing large population movements, infrastructure needs seem likely to remain strong in the period ahead."

The RBA says China now accounts for 40 per cent of world iron ore imports, between 10 and 20 per cent of copper and nickel imports and 4 per cent of coal imports.

India is also growing rapidly, with industrial production rising 11 per cent in the year to August, while growth elsewhere in Asia reached 5.7 per cent in the year to June.

The RBA expects softer economic growth in the US, but is far from pessimistic about its outlook.

"Moderate growth is continuing, notwithstanding the downturn in housing construction.

"The fundamentals continue to suggest a favourable outlook: capacity utilisation remains high, corporate balance sheets are healthy and profits are high."

The bank says sentiment in financial markets has improved although it remains fragile, with concerns re-emerging at various times about the extent of exposure of large financial institutions to the sub-prime mortgage risk.

"Notwithstanding the recent credit market strains, strong global demand has continued to support high commodity prices," the RBA says.

The bank's commodity price index has risen by 6 per cent in the year to October, with rural prices rising 15 per cent, base metals falling 4 per cent and coal, iron ore and gold having risen by an average of 3 per cent.

The RBA expects iron ore prices to rise 30 per cent from April next year, while it also believes there will be a substantial increase in the coal price.