Regional China: The next phase of economic growth

Rio Tinto’s (ASX: RIO) chief executive Sam Walsh believes there are still international “misconceptions” regarding China’s future growth prospects, stating that the nation’s demand for commodities such as iron ore is showing no signs of ending anytime soon.

China, the world’s fastest growing economy, is currently forecast to deliver growth of 7.5% this year, which is a slower rate of growth than in years past. However, Mr. Walsh believes that the next bout of growth should come from regional areas just outside of major cities, where growth is still predicted to be at least 10% each year.

He said that China “is not all skyscrapers and Gucci stores. There are still hundreds of millions of people in the central and western regions who are waiting for modern infrastructure and the urban lifestyle that it supports.”

Of course, greater amounts of commodities such as iron ore, copper and energy would be required to meet those needs – a factor companies such as Rio Tinto, BHP Billiton (ASX: BHP) and Fortescue Metals Group (ASX: FMG) have recognised.

Each of these companies have heavily ramped up their production levels of commodities to cater for what they perceive will be heavy demand for years to come. Rio Tinto, for instance, has a current goal of producing 290 million tonnes of iron ore per year but is expected to approve the expansion of production to 360 million tonnes, at a cost of $5 billion.

Meanwhile, the companies are also focused on cutting costs of production to ensure that operations remain highly profitable should commodity prices fall.

Foolish takeaway

Although shares in the miners have been heavily sold off over the last couple of years, investors are starting to recognise that there may still be significant life left in the companies. Whilst that could very well be the case however, the sector still faces heavy headwinds that could force share prices much lower than their levels today. As such, it may be wise for investors to wait on the sidelines for a more attractive entry point.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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