What happens in China will have a profound impact on "Canada's Business". Events in that Asian country will have ramifications, both direct and indirect, that will affect our economy.
Canadian exports to China amount to approximately $1 billion annually, and that represents slightly more than 2 per cent of our total export volume. This number, however, is only a small part of the picture.
China now is the second largest economy in the world and, consequently, it plays a great role in global economic activity. It is very heavily dependent on exports and is the largest source of all kinds of external demand for raw materials, commodities such as copper, lead, nickel, zinc, aluminum, and most other metals, as well as lumber, oil, and heavy machinery as part of its capital investment program. China for decades has been importing agricultural products, mainly wheat and corn. The latter started under Prime Minister Diefenbaker when China signed contracts for hundreds of millions of dollars of grain for several years. The strong demand pushed up the price of most commodities, providing major support for Canadian exports of those items.
It should come as no surprise that the Canadian dollar has soared, reflecting the weakness in the U.S. currency, but also because of the huge demand for our commodity-oriented economy.
Then too, the strength of the Chinese economy had its origins in its tremendous move to exports. Now a disproportionate share of that economy is skewed to exports and the capital spending projects to expand further its export volume. Chinese investment share of GDP, primarily to increase exports, threatens to pierce the unheard of 50 per cent threshold, compared to an average 15-20 per cent of other rapidly growing nations. As a result of the export drive, it has accumulated trillions of U. S. dollars, and a significant portion of those funds have been placed in U.S. Treasury obligations, and thereby kept interest rates there at subdued levels. Those abnormally low interest rates have fuelled speculation in assets like real estate or the stock market. As the reserves have piled up China has started to place funds in other nations as well. Interest rates and commodity prices have been distorted.
Following the post-crisis in external demand, China is turning to a new model, one driven by much more internal private consumption. Once that occurs the average Chinese will respond by seeing many choices that are not imposed by a central government. That certainly will strip the Communist Party of some of its ability to dictate to the public or the course of the economy. The loosening of the grip of the central authority will open new avenues and freedom for the average person. Individual dreams can be pursued, ones not enforced by an authoritarian, central headquarters. In addition, as China invests billions of dollars in many other countries, the Chinese economy will be subject to the vagaries of their economic situation.
Hence, the outlook for the Canadian economy in part depends on the ripple effects of the weakening authority of the Chinese Communist Party.
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