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Why China\u2019s economy is faltering \u2014 and how that might impact Canada<\/strong><\/p>\n

By Craig Lord Global News<\/p>\n

Posted August 22, 2023 6:00 am<\/p>\n

Growing signs of weakness in China\u2019s economy could be \u201cgood news\u201d for Canada\u2019s inflation fight, but experts warn it could also mean a steeper downturn domestically this fall.<\/p>\n

The early stages of China\u2019s rebound from the COVID-19 pandemic spurred hope for a stronger global recovery at the start of this year, but recent months have seen some economic forecasters slash expectations for the world\u2019s second-biggest economy.<\/p>\n

Here\u2019s a look at what\u2019s behind China\u2019s faltering economy and the ripple effects it could have in other countries.<\/p>\n

What’s behind China’s economic decline?<\/p>\n

China stocks fell to around nine-month lows on Monday as investors reacted to milder-than-expected measures by authorities to boost confidence in the economy, with sluggish recovery, high youth unemployment and property woes keeping sentiment fragile.<\/p>\n

Economic output and consumer spending came in below expectations in July, coming off one of China\u2019s weakest quarters for annualized growth in decades.<\/p>\n

Jimmy Jean, Desjardins\u2019 chief economist, said in a note on Aug. 11 that slowing foreign-direct investment, Western trade restrictions and a trend of multinational corporations reconfiguring their supply chains away from China post-COVID are all compounding to hamper growth.<\/p>\n

\u201cWe were always skeptical of the narrative that China\u2019s reopening would save the global economy this year,\u201d he wrote. \u201cSo far, there isn\u2019t much proving us wrong.\u201d<\/p>\n

China cut bank lending rates in an effort to spur activity in the economy, but those moves fell short of some analyst expectations.<\/p>\n

The government is trying to reassure uneasy homebuyers and investors about the deeply-indebted real estate industry after one of China\u2019s biggest developers, Country Garden, failed to make a payment to bondholders last week.<\/p>\n

China\u2019s real estate vulnerabilities<\/p>\n

Like Canada, China\u2019s economy is especially vulnerable to downturns in the real estate market, says BMO senior economist Art Woo.<\/p>\n

Real estate, including the housing market, construction and furnishings, makes up about 25 per cent of China\u2019s gross domestic product, Woo tells Global News.<\/p>\n

Chinese cities have been experiencing a boom in real estate in recent years with an urbanization push from China\u2019s rural regions.<\/p>\n

\u201cIt\u2019s this massive demand for people who want to get into housing,\u201d Woo says, comparing the phenomenon to Canadians and newcomers attempting to break into expensive domestic markets such as Toronto.<\/p>\n

Housing is also an attractive investment asset in China, where Woo says residents will often purchase second properties as a place to grow their life savings.<\/p>\n

\u201cThat magnifies the importance of (real estate) in terms of an asset for people to live, but also an asset in which people have invested,\u201d he explains.<\/p>\n

But Woo says China\u2019s real estate sector has been particularly unstable in recent years amid the Evergrande Group crisis, which has seen one of the country\u2019s largest housing developers default on its debts. That has soured many investors on the country\u2019s housing market.<\/p>\n

Chinese President Xi Jinping has called for patience as the ruling Communist Party tries to reverse the deepening economic slump.<\/p>\n

China\u2019s slowdown and the impact on inflation<\/p>\n

A slowing Chinese economy is set to affect demand for commodities globally, Woo says.<\/p>\n

Amid the urbanization drive and the push to expand critical infrastructure like high-speed rail in China, the country has become responsible for roughly half the world\u2019s demand for base metals in a typical year, he says.<\/p>\n

While Canada is an exporter of critical minerals, its direct outbound trade with China is limited, with exports to the country accounting for roughly one per cent of Canadian gross domestic product over the past five years, Woo says.<\/p>\n

Commodity prices are set globally, however, meaning changes on one side of the world will affect prices internationally.<\/p>\n

\u201cFor commodity exporters \u2014 and Canada is one \u2014 it has a huge impact,\u201d Woo says.<\/p>\n

Jean said in his note earlier this month that a slowdown in China is having a chilling effect on prices for exports coming out from the manufacturing juggernaut.<\/p>\n

China has ended up an \u201cally\u201d in Canada\u2019s efforts to rein in inflation, Jean argued, citing the largest drop in import prices since 2017 in Statistics Canada\u2019s latest international trade report.<\/p>\n

\u201cChina\u2019s woes are ironically helpful in the fight against inflation,\u201d he wrote.<\/p>\n

The Bank of Canada is hoping to see inflation pressures ease as it gears up for its next interest rate decision on Sept. 6. Annual inflation ticked up half a percentage point to 3.3 per cent in July, with high gas prices partially to blame.<\/p>\n

Slowing growth from the world\u2019s second-biggest economy is sure to have an impact on demand for oil, Woo notes.<\/p>\n

\u201cIn a way, a slower China takes off pressure, in terms of demand for certain goods,\u201d he says.<\/p>\n

\u201cThe Bank of Canada is still worried about inflation. Inflation\u2019s still above target. So that could be good news.\u201d<\/p>\n

Global oil prices have been climbing over the past two months amid production cuts from OPEC+. While that\u2019s bad news at the gas pump, it\u2019s typically good news for Canadian oil exports.<\/p>\n

Jean outlined in his note the offsetting effects of slowing demand in China and Europe alongside cuts from OPEC and signals of acceleration in U.S. shale production. For Canada, these factors are likely to be a wash as it relates to gas prices fuelling inflation, he argued.<\/p>\n

\u2014 with files from the Associated Press, Reuters<\/p>\n

Why China’s economy is faltering \u2014 and how that might impact Canada<\/a><\/p><\/blockquote>\n