Having been the economic engine of the global economy since the 2008 financial crisis, Chinese growth has slowed to just 7% in 2015. While that is significantly higher than both Canada and U.S. GDP growth, it represents the slowest rate of growth in a quarter century. And China’s economic slowdown could have a lasting impact on the Canadian economy and stock market.
China’s Trade Relationship with Canada Flourishes
Over the last 20 years, the economic relationship between Canada and China, the world’s second-largest economy, has flourished. Today, China is Canada’s second most important trading partner after the U.S.
In 1997, China accounted for just 0.7% of Canada’s exports and 1.9% of imports. Total bilateral trade was $8.7 billion. Between 2003 and 2013, exports to Canada began to increase, growing at an annual rate of 17%. This growth brought China’s share in Canada’s imports to 11% from 4% a decade ago.1
China is now Canada’s second most important export and import market with bilateral trade reaching approximately $78.0 billion, or almost 10 times the 1997 level. Only trade with the U.S. is greater; with a 76% export and 52% import share.
This increasingly important relationship helped Canada stave off the Great Recession that hurt the U.S. and global economies.
In particular, China has an insatiable appetite for Canadian exports, especially our natural resources. Where demand for our natural resources fell during the global recession, demand was robust from China.
But this reliance also makes the Canadian economy vulnerable in the event of an economic slowdown in China.
China’s Economy Grinding Down
China, the world’s second-biggest economy, is in trouble. In 2015, it is expected to report GDP growth of just 7%. The slowest rate in the last 25 years, and down sharply over its 10% annual growth rate of just a few years ago. This slowdown could stall the Chinese economy and send global stocks into a tailspin.2
On October 19, China’s National Bureau of Statistics announced that third-quarter GDP expanded 6.9%. But few economists outside of China actually believe this number to be accurate. Most think China’s third-quarter growth was between 4% and 4.5%.3
This is where the numbers are a little misleading. No economy can expand at 10% unabated; there are going to be hiccups. Even 4% growth for a $10.0 trillion economy is still $400 billion, and it’s worth more than the 10% growth a decade ago when China’s economy was just $2.0 trillion. So the Chinese economy is slowing down, but it isn’t going to collapse.
To help kick-start its economy, China has cut interest rates five times since last November (to 4.85%) and devalued the yuan to encourage lending and boost growth. Broad weakness in the Chinese economy will weigh on the global economy.
In fact, signs of China’s weakening economy can be already be seen from the decline in GDP growth among emerging economies, low commodity prices, and the downturn in global trade.
And low commodity prices are bad for a natural resource-rich country like Canada, where crude oil accounts for around 14% of exports. And it’s one of the biggest contributors to the country’s GDP. This will negatively impact Canadian stocks, the Canadian dollar, and hinder economic growth.
Keep in mind, all of these factors open up a window of opportunity for investors.
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- “The Impact on Canada of the Rise of the Chinese Economy: Good, Bad or Indifferent?” Queen’s University, https://www.queensu.ca/sps/publications/workingpapers/50-Drummond-Clemens_2014_Canada-China.pdf.
- “GDP Growth (annual %),” World Bank website; https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG.
- “Overall Economic Development was Stable in the First Three Quarters of 2015,” National Bureau of Statistics of China website; https://www.stats.gov.cn/english/PressRelease/201510/t20151019_1257742.html.