Canadian businesses have much to lose if China puts security over economy, experts say
China’s mediocre economic growth, paired with the issue’s neglect during the recent 20th National Congress of the Chinese Communist Party, has raised concerns about the country’s lack of attention to economic policy.
According to experts, that disregard by the world’s second-largest economy could have a damaging impact on Canadian business and beyond.
China announced on Monday that its gross domestic product had risen 3.9 per cent in the third quarter compared with the same period a year earlier. The figure fell below Beijing’s 5.5 per cent growth target and well behind the eight per cent experts say is required to support future population and economic growth in China.
Beijing had delayed releasing its GDP data on Oct. 18, the second day of the party’s congress. It’s likely that Beijing wanted to keep economic growth and its consequences out of the headlines during the congress, which ended on Oct. 22, said John Gruetzner, co-founder of Asia-focused business advisory firm Intercedent and a fellow with the Canadian Global Affairs Institute.
The weeklong party congress, held twice a decade to appoint new leaders, assess the constitution and affirm China’s ideological orientation, is perhaps the most significant event on the Chinese Communist Party’s calendar. It ended with President Xi Jinping securing an unprecedented third term as party leader, presiding over a cabinet loyal to his ambitions of consolidating power, deterring opposition and extending term limits.
Canada’s exports to China rose in 2021
Withholding data that’s as significant to trade relations as GDP was “pretty much unprecedented for any major trading country,” said Charles Burton, a senior fellow at the Macdonald-Laurier Institute, a former counsellor at the Canadian Embassy in China and an associate professor of Chinese and comparative politics at Brock University in St. Catharines, Ont., until 2020.
“I’m not sure what signal China’s sending to global trading partners by not providing us with the normal kind of interaction we would expect, which would be a statement of China’s economic prospects,” Burton said prior to the GDP release.
China’s 3.9 per cent third-quarter growth was a bounceback from spring’s measly growth of 0.4 per cent. In the end, “the number came back stronger than many had anticipated, including us,” said Andrew Hencic, senior economist with TD Bank. Its economists had estimated growth of 2.8 per cent.
“Looking forward, we’ll see to what extent that moment can be carried through,” Hencic said. That’s especially true as countries around the world, including Canada, are anxious to see whether, to their detriment, Xi will place national security and politics ahead of economic performance.
“It’s clear that over a period of time, one-party states ultimately tend to hit a wall,” Gruetzner said. “If you don’t have multiple inputs into your economic and social policy, you’re ultimately going to have an economic growth problem.”
Canada counts China as its third-most valuable trading partner, behind the United States and the European Union, but second if EU countries were counted individually. Canada’s exports to China grew steadily throughout 2021 to $28.8 billion, according to the University of Alberta — the highest amount since before the COVID-19 pandemic and $10 billion more than was exported in 2016.
The agriculture, meat, paper and mining industries, which drive Canadian exports to China, must be cognizant of how GDP slowdowns might impact their investments in China’s economy, Gruetzner said.
Iron ore, oil, coal and copper prices, in particular, react “very, very quickly” to shifts in Chinese GDP growth, he said. “There’s a whole portion of the Canadian economy that requires China to have the demand. Certainly in the western provinces.”
Share prices in Canadian fertilizer company Nutrien, based in Saskatoon, and Teck Resources Ltd., an agricultural feed developer and metals company headquartered in Vancouver, both saw dips on the Toronto Stock Exchange the day of China’s GDP release ($113.07 to $108.33, and $48.05 to $46.95, respectively).
GDP growth in China faces obstacles
China’s zero-COVID policy and housing crisis have continued to hold back the world’s second-largest economy from a full economic recovery post-pandemic, Burton said. Both will likely impact China’s export-oriented economy and “could be quite disturbing for Canadian business and the global economy in general,” he said.
Although Beijing’s zero-COVID policy has kept total infections in the country of 1.4 billion people to just over one million, it’s hampered the efficiency of China’s ports, decommissioned half of its highways and instituted a total shutdowns of cities that together account for 40 per cent of China’s GDP, according to a report from Alicia Garcia Herrero, the chief economist for Asia-Pacific at French investment bank Natixis.
China strengthened its commitment to the zero-COVID policy this week, sealing buildings, locking down districts and placing millions at home as the country on Friday reported 1,000-plus cases for three consecutive days.
China’s housing sector is also in the midst of a serious crisis. A lack of government funds has led to several delays in housing construction, and Chinese borrowers who paid for their homes in advance have been left without their investment, Burton said. Local governments in China traditionally fund operations through land auctions and have felt the consequences in their coffers.
Were Chinese economic growth to stay below eight per cent, there would be consequences for the country’s ability to meet its more than $9 trillion US debt obligations, as well as youth unemployment, Gruetzner said.
In 2020, China’s Ministry of Education reported that nearly a quarter of college graduates could not find work, following years of plentiful jobs due to strong economic growth over the past two decades.
Reports from China’s 20th Communist Party Congress suggest that the government will nonetheless prioritize national security and military growth in the face of U.S. competition ahead of focusing attention on the economy for its own sake and that of its trading partners, Burton said.
China is on record as wanting to redirect its agricultural and commodity imports away from Western suppliers and toward those in South America and Africa, Gruetzner said.
Burton said both should be a consideration for Canada as it openly reassess trade relationships in the region.
Canada plans to release Indo-Pacific policy
During a speech in Washington, D.C., on Oct. 12, Deputy Prime Minister Chrystia Freeland suggested Western democratic countries prioritize free trade with one another and limit opportunities for states actively working against their values. Governance in Russia and China, for example, has become increasingly consolidated and autocratic.
Those considerations could be a feature of the upcoming Indo-Pacific policy statement, which Canada’s minister of foreign affairs, Mélanie Joly, said would be released following the Chinese party congress and before the end of the year.
“In the coming decades, developments in the Indo-Pacific region will have profound impacts on the lives of Canadians from coast to coast to coast,” Joly said in a news release, adding that Canada is committed to strengthening its presence in the region.
On Thursday, during a visit to Ottawa by U.S. Secretary of State Antony Blinken, Joly announced that Canada plans to seek membership to the Indo-Pacific Economic Framework for Prosperity to boost economic co-operation.
“There will be a strong section on implications for the economy” within the coming policy statement, Burton said. “A lot of businesses would like to see what the government’s intentions are before they consider their choices with regard to investment in China.”