Don’t give up on China just yet. Sure some of the sheen has come off the world’s economic behemoth in recent years. Sky-high double-digit growth has come back to earth and, as the country prepares for a new five-year plan, challenges in the banking sector, housing and credit issues have put the country on the risk radar. But to paraphrase, the news of China’s demise has been greatly exaggerated.
Export Development Canada’s (EDC) fall global forecast for the world’s most populous nation and second largest economy, is for growth of 7.5 per cent in 2014 and 8 per cent in 2015–not as strong as in past years, but still more than double what any large industrialized nation can muster on a great year. And China, a major global exporter, can expect to do even better going forward once the U.S. economy fully recovers and Europe emerges from its overly long slumber.
“Everybody is in a tizzy about slowing GDP in China,” says Richard Schuster, EDC’s senior economic specialist for Asia, “but remember we are dealing with an economy of US$10.4 trillion that is fast catching up to the U.S., and one that imports about US$2.3 trillion in goods and services each year. China is and will remain a major source of growth for the world.”
China enters a Healing Phase
In fact, Schuster believes China is already entering a healing phase. The new five-year plan, which comes into effect in 2016, will likely continue the process of diversification of the economy, urbanization and internal development. Credit is overstretched but stabilizing. Chinese firms have been investing and expanding throughout Asia. Most significantly, the Chinese government, armed with $4 trillion in foreign reserves, has the war chest to meet most emergencies.
For Canadian exporters, the question is: Can they take advantage of the still dizzying pace of change and growth happening on the other side of the world.
Recent history suggests that is still an open question. Canadian exports to China have grown strongly, almost doubling in size from 2009 to $20.4 billion in 2013. But at the same time, Canada’s share of China’s overall imports continues to slide, meaning that other countries are doing better.
The recent downturn in global minerals and metals is also impacting Canada’s trade performance with China. And the potential for sales of petroleum, which could be a game-changer, are still years away, awaiting a solution to the vexing problem of getting Alberta oil to a coastal refinery.
Where are the Opportunities?
Another approach for Canadian businesses, says Todd Winterhalt, EDC’s Vice-President of International Business Development, is for companies to focus on the potential that already exists and climb up the food chain to more value-added exports. He sees three sectors – biotechnology, clean energy and next generation information technology – as holding great potential for Canadian firms.
“I would say we are well positioned in all three,” he says. “We have strong capacities in vaccine manufacturing, wind and solar energy, as well as software and machine-to-machine language.”
Winterhalt acknowledges that many Canadian firms are still risk-adverse, particularly when it comes to engaging with a centrally planned economy such as China’s, where the government continues to hold a tight grip on every facet of society. The recently ratified investment protection and promotion agreement with Beijing however, should offer some level of comfort.
But there are other ways for Canadian firms to get in the China game without engaging in direct investment, he adds. That includes participating in global production chains, partnering with Chinese firms, or acting as suppliers to western firms already operating in the country.
“When most people think of exports and investment, they tend to think of the traditional point-to-point model. But more and more, Canada needs to take part in value or supply chain connections, or in investing with firms in China. That’s where we need to be.”