Reserve Bank Governor Glenn Stevens today has issued a warning that China's slowing growth will impact on Australia's economic prospects.

This was the first time that the RBA admitted that they have underestimated the surge in commodity prices, which has been fuelled by China's demand and benefitted Australian industries.

''China is tightening their policies with a little more determination maybe now than we saw last year,'' said Mr Stevens at a speech in Melbourne today. ''(that) means we can expect to see China slow down this year and we have a big stake in managing that process as smoothly as possible."

"That's going to be a cyclical event overlaid onto the longer run structural adjustment that probably has quite some years to go," said Mr Stevens of China's economic development.

Chinese financial regulatory authorities have begun to control inflation by lifting interest rates while tightly watching lending by banks and property investments.

Australia's commodity exports, which are now at record prices, has added some 13 percent to the country's annual national income. A sudden decline on China's demand would otherwise bring down the average price of primary Australian commodities iron ore and coal.

Beating RBA forecasts

Without batting on his estimates, Mr Stevens, however, noted that commodity prices had defied the forecasts of RBA for years.
"Prices observed over the past year have exceeded, more or less continually, what had been assumed," said Mr Stevens in the speech, given to the Victoria University Public Conference on the resources boom.

"Even under the Bank's current assumptions, however, the terms of trade are still very high, by historical standards, at the end of the forecast period," he said.

Australia's balance of trade closely hovers that of the relative prices of exports versus those of imports, and now stand at a 60-year high, due to the very huge demand from Asian countries led by China and India.

A related Bloomberg report said increased demand for these commodities has driven up prices and Australia's terms of trade are about 65 percent above the average level for the 20th century.

"With the terms of trade at their current level, Australia's nominal GDP is about 13 per cent higher ... than it would have been had the terms of trade been at their 100-year average level," Mr Stevens said in his speech.

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