A bright outlook for China's growth prospects and commodities demand

Pessimism is de rigueur among commentators regarding the prospects for China's economy.  GDP growth has slowed from double digit rates to 7.5% in recent years, while prices across most hard commodities continue to slide.

But the Reserve Bank has weighed into the debate with a timely reminder that the long term outlook for Chinese demand for iron ore and steel is bright, underpinned by growing steel intensity in household consumption and residential construction, while China's per capita energy consumption remains low by the standards of advanced economies.

Historically, investment has been steel intensive relative to household consumption.  But as cities grow and incomes rise, steel demand associated with motor vehicle ownership - which remains very low by the standards of advanced economies - should increase (see chart).

Greater motor vehicle ownership will add indirectly to the construction of underground car parks in apartment and commercial buildings.  As the process of urbanisation continues, the construction of taller buildings to accommodate more city dwellers will also lift steel demand.

China's per capita energy consumption remains low by international standards.  The fact that coal dominates China's energy usage is clearly contributing to greenhouse gas emissions and air pollution in most of the country's major cities.  The chart below suggests that there is plenty of scope for renewables, oil and nuclear energy to displace coal over time.

In the short-term, concerns about credit bubbles, the opacity of the financial system, renewed weakness in residential and commercial property markets and the extent to which environmental controls impose constraints on China's growth path will provide plenty of fuel for the pessimists.

While the Reserve Bank communication today didn't address the question of China's sustainable long term growth prospects, there are reasons to be the optimistic thanks largely to catch-up.  At comparable levels of development to China - in terms of GDP per capita relative to the United States - Korea, Taiwan and Japan continued to experience rapid growth for decades.

The pessimists might be winning the battle at present, but there are good reasons to be optimistic about China's longer run growth prospects and demand for commodities, even as the economy re-balances towards more household consumption.