a bit since the start of this year, but there is little sign to date of a sustained improvement in construction activity. weakness in construction has been accompanied by declines in output of a range of manufactured products over the past year. 1 steel is one obvious example. mining activity in china has also been affected. indeed, a further decline in the output of unprofitable chinese mines would provide some support to commodity prices, and would benefit other producers, including in australia. the substantial appreciation of the renminbi over the past year ( 12 per cent in trade weighted terms ) may also have contributed somewhat to the weakness in the industrial sector bis central bankers ’ speeches although the weakness in china ’ s property and manufacturing sectors is clearly of concern to commodity exporters like australia, there are a number of countervailing forces supporting broader activity in china. • first, growth in the services sector has been resilient, and should continue to be assisted by a shift in demand toward services as incomes rise. • second, growth in household consumption has also been stable in recent quarters aided by the growth of new jobs. 2 of course, such outcomes cannot be taken for granted ; if the industrial weakness is sustained, it might eventually affect household incomes and spending. • third, chinese policymakers have responded to lower growth by easing monetary policy and approving additional infrastructure investment projects. they have scope to provide further support if needed, although they may be reticent to do too much if that compromises longer - term goals, such as placing the financial system on a more sustainable footing. there are two key implications of the slowing in china ’ s growth for australia. first, the substantial slowing in industrial production has contributed to a further decline in commodity prices over the course of this year. ( this is in addition to the contribution from the substantial increase in the supply of commodities, including from australia. ) we ’ ve detailed the effect of the decline in commodity prices on australia ’ s economy elsewhere. 3 i would just add that commodity prices remain relatively high. the bank ’ s index of commodity prices has fallen by about 50 per cent from its peak, but is still almost 80 per cent above early 2000 levels. clearly, conditions in the industrial sector in china, and asia more broadly, will have an important influence on the path of commodity prices over the near term. beyond that, the changing nature of china ’ s development implies that the potential for commodity prices to rise from here is somewhat limited. second, the

in any one year being 10 basis points. 6 as a result, even the holders of lower rated tranches of rmbs have not suffered any losses, as the insurance, together with the subordination embodied in the rmbs, has provided a more than adequate buffer. the effect of the financial crisis the financial crisis has had a material affect on pricing and structure in the australian mortgage market but has not had a particularly marked impact on the quantity of housing credit provided. rba ( 2006 ), “ the performance of australian residential mortgage - backed securities ”, financial stability review, march, pp 63 – 68. beginning around the middle of 2007, there was a widespread reappraisal of the risks associated with investing in structured credit products. securitisation started to suffer severe brand damage as primarily us rmbs incurred significant credit problems as delinquency rates began to rise. 7 initially, the problems were most evident in the sub - prime mortgage market, but they later spread to prime mortgages in the us as well. combined with the decline in house prices, these delinquency rates have led to large losses for investors in us rmbs. the australian rmbs market was significantly affected, even though ( as already discussed ) lending standards were much better in australia, and the rmbs continued to perform well. issuance dried up markedly ( graph 6 ). most of the issuance during late 2008 and the first half of 2009 was purchased by the australian government through the australian office of financial management. offshore sivs, which had been large buyers of australian rmbs prior to the financial crisis, were forced to liquidate their portfolios as they were no longer able to fund themselves. these sales into the secondary market drove spreads from about 15 basis points ( over the bank bill swap rate ) pre - crisis to a peak of over 400 basis points in early 2009. this very wide secondary market spreads also deterred new issuance. graph 6 the crisis also had a material effect on the funding costs of all providers in the mortgage market. in addition to the effect on rmbs funding described above, wholesale ( and particularly recently ) retail funding costs have risen relative to the cash rate. 8 in response to the rise in funding costs, all institutions have raised their mortgage rates relative to the cash rate. interestingly, while the standard variable rate has been increased, there is little sign of any reduction in the discounts offered on new loans. the average rate on variable rate housing loans