The global economy has been waiting for China’s post-COVID economic boom, but that has not materialized. And the opposite could well be playing out, with analysts saying this serves as yet another reminder for Canada to wean itself off China.
At issue is China’s bloated property market, which by some estimates makes up over 25 percent of the country’s economy. At risk are commodity prices, which had been given a long-term boost from China’s real estate overbuilding.
CIBC chief economist Avery Shenfeld told The Epoch Times on Aug. 23 that a property market crash “could potentially impact China’s demand for raw materials, with a spillover to the prices for some of Canada’s resource exports.”
But he also pointed out that a slowdown in exports would be helpful for Canada in getting its elevated inflation to move lower and reduce the need for higher interest rates.
Carleton University business professor Ian Lee, who taught MBA and executive MBA programs in China and Hong Kong for several years, says he’s “very pessimistic” about China’s future and believes it will become less economically relevant over time.
Two reasons are emerging for Canada to decouple from China.
In addition to China’s economic fragility and dubious longer-term prospects, Mr. Lee says what will primarily compel Canada to decouple from China is a desire to not “risk angering” the United States.
“To the extent that we have to decouple in higher tech, more sensitive industries, it’s not going to be driven so much by the increasingly dire economic situation of China. I think it’s going to be driven by the fact that if we don’t decouple from China in sensitive areas, we’re going to be increasingly alienated from the United States,” Mr. Lee said in an Aug. 24 interview.
Flagging Chinese Demand
While central banks in Canada and the United States have been raising rates aggressively to tame inflation, in China the situation is quite the opposite where the central bank has been cutting rates to prop up the economy and stimulate demand.
The Chinese authorities are urging their banks to increase lending to bolster the economy but, Bloomberg reported that in July, banks lent the smallest amount of monthly loans since 2009, which is another suggestion of weak demand in the economy.
Both exports and imports for China are falling, and Chinese stocks (CSI 300) fell to a nine-month low on Aug. 21, when markets reacted unfavourably to the smaller-than-expected stimulus from the Chinese central bank.
China’s currency is trading near its lowest levels since 2007, and youth unemployment in the centrally planned economy is at its highest in recent history. Chinese authorities have stopped reporting on this employment data.
Mr. Lee also notes that one of China’s many structural problems is its aging population, which actually declined in 2022.
Centrally Planned Failure
At the root of China’s economic woes, Mr. Lee says, is its centrally planned economy.
Initially, authoritarian regimes can force labour to build infrastructure and thus see some economic gains, Mr. Lee adds, but when the economy matures and it becomes time for greater innovation for further economic growth, that’s when threats and coercion don’t work as well.
“They can’t solve the problems of central planning with yet more central planning, because the flaws of central planning are endemic, they’re less efficient, and we’re seeing this right now, as I speak, in China,” he said.
Democracies make mistakes, Mr. Lee says, but then they can fix them with businesses either pivoting or being replaced, whereas authoritarian regimes like China with their top-down decision-making are much slower to react.
“Many people have been arguing, economists have been arguing, that China has to massively restructure and become much more decentralized, much more market-driven. And of course, the biggest barrier to that is the Communist Party, because they don’t want to give up power.” he said.
‘Symptom of the Underlying Disease’
China’s huge amounts of debt at every level of government and in the business sector is a “symptom of the underlying disease,” Mr. Lee said.
China’s economy—unlike most free democracies in the world—has not been built around consumption, but rather investment, he noted.
“There’s a massive misallocation of resources that in turn then causes these huge problems in China of massive indebtedness, and that’s the outcome or symptom of the underlying huge structural problems in China,” Mr. Lee said, adding that China has a very “unbalanced” economy.
China has overbuilt its property sector, which contributed significantly to prior years’ growth, but once again the cracks in this strategy are getting bigger.
“Getting China’s economy back on the rails will likely require Beijing to provide more stimulus to domestic consumption and steps to shore up the health of its financial system to cope with losses tied to real estate lending,” Mr. Shenfeld said.
China Beige Book managing director Shehzad Qazi points to how excessive debt impedes long-term growth and prosperity.
“Beijing’s ability to recycle bad debt or orchestrate de facto bailouts when needed means a lot of good money being thrown after bad. And it does mean capital being allocated away from more productive uses, all of which hurt long-term growth,” he tweeted on Aug. 21.
Canadian pension funds have been criticized for growing their investments in China over the years, but increasingly, institutional investors have been seeking better returns and safer investments elsewhere.
Now, with much higher interest rates in the United States than in China, money is increasingly expected to flow out of China.
“If I was a pension fund manager, I'd be looking at China and saying, ‘What are the next 10 years going to look like economically? And am I going to get a good return on my investment on stocks in China?’ And my answer is no,” Mr. Lee said.
Both Mr. Shenfeld and Mr. Lee say that for Canada and other democracies, the next leg up for growth could be one that puts less reliance on China than what’s been seen in the past.
