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SYDNEY, Feb 6 AAP

February 06 2013, 1:11PM

Australia faces a tough period of economic adjustment as China's demand for coal and mineral exports decreases, a leading economist says.

But new opportunities will also arise, says Professor Ross Garnaut, who authored the key Garnaut Climate Change Review in 2007.

The quality of policy and "dexterity of our business leaders" will ultimately determine how well the Australian economy weathers these changes, he said during at keynote address at the 57th annual Australian Agricultural and Resource Economics Society conference in Sydney on Wednesday.

Prof Garnaut said China's demand for thermal coal will ease as it alters its energy policies to focus on environmental impacts.

At the same time demand for other sources of exportable energy from Australia, such as natural gas, will increase.

"Within the (Chinese) thermal power sector there will be a greater reliance on natural gas," Prof Garnaut said.

"That will actually strengthen demand for one of our rapidly growing export products."

However huge reserves of gas in China and the US mean Australia will face more competition selling to China.

"All of that means that Australia is left with a pretty big adjustment problem," he said.