OTTAWA — A Bank of Canada report suggests Canada owes much of its hot commodities-driven economy and the surging dollar to China's insatiable demand.

The report says China will continue to drive up commodity prices such as oil and minerals for years to come.

The paper in the bank's fall review says China's economy has been expanding by an annual average of 9.7 per cent for the past quarter-century and there appears to be no end in sight.

Even so, China's impact on trade patterns since joining the World Trade Organization in 2001 and subsequent runaway demand for oil and metals has caught the world by surprise, says the paper.

“Together, these two effects help explain the recent change in the relative prices of these goods,” says the paper titled “The Effect of China on Global Prices.”

“For oil and metals, China's size and growth are likely to remain among the key factors driving the growth of global demand for some time.”

For instance, the paper notes that international bodies consistently underestimated China's demand for oil, which increased by 28 per cent from 2002 to 2004, and have contributed to the steep rise in crude oil prices to near $100 U.S. a barrel level today.

As well, in 2002 China accounted for about 13 per cent of world trade in metal ores. Three years later, that slice of the pie had grown to 25 per cent, with estimates it may have exceeded 30 per cent in 2006.

As a result, between 2001 and 2006, prices for metals such as aluminum, copper, nickel and steel have almost tripled.

The paper equates China's emergence and impact on the world economy to that of Japan in the 1960s, saying that exporting countries will likely react by increasing supplies of these commodities, but the adjustment will take some time.

“Hence, the relative prices of commodities can also be expected to remain somewhat elevated.”

Canada's economy has ridden the wave of global commodity prices since 2002, when the Canadian dollar began its move from under 70 cents to parity with the greenback.

China's impact has not been all on the inflationary side, the paper adds, noting that the country's accession to the WTO has also resulted in the availability of less expensive consumer products in global markets, such as clothing.

“At this point ... definitive empirical evidence that China is a net source of disinflation, or inflation, remains elusive,” the paper concludes.

In another paper in the review, the central bank says foreign exchange markets are becoming larger and more efficient as a result of technological improvements such as electronic trading and other factors.

“As a result,” the paper says, “foreign exchange and other markets are arguably becoming more open, transparent and liquid.”