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The Globe and Mail

China's growth is Canada's gain

Dump trucks move waste rock around Teck's Highland Valley Copper Mine

JOHN LEHMANN/John Lehmann/The Globe and Mail

If there's one word that looms large in Canada's economic future, it's China.

If the Economist Intelligence Unit, a global research firm, is correct, Canada will take a hard-earned lesson from the recent economic crash and decrease its dependency on its No. 1 trading partner, the United States, and put more eggs in the basket of its No. 2 partner, China.

Canada and China stand to do about $54-billion (Canadian) in trade this year, which is still a far cry from the nearly $600-billion (U.S.) in trade between the U.S. and Canada. So there's a lot of room for improvement.

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China experienced no recession in 2008-09, and is expected to outpace the world and grow by 8.6 per cent in 2010, quadruple the rate of the United States. At that pace, it will become the world's foremost economy by 2035. Quietly, it already became the world's largest exporter in 2009.

These numbers show David Emerson, Canada's former International Trade Minister, who has a long-abiding interest in Asia, that our future lies with China. "Few today seriously doubt that China will be a key player for as far as we can see in the future, and few would doubt the importance of Canada increasing our engagement with China as part of our trade and foreign policy," he told an Ottawa audience recently.

Prime Minister Stephen Harper has seen the light. He finally followed Mr. Emerson's numerous entreaties to visit China personally, which he did in December, remaining stoic as Chinese Premier Wen Jiabao upbraided him in public, complaining that five years is too long between visits of the heads of the third and 11th largest economies in the world. As the engine of global economic recovery, China is too important to alienate.

Investors trying to figure out the post-recession climate should pay attention to what's going on between China and Canada, as China has already acted as the engine of recovery for Canada's largest publicly traded mining company - Vancouver's Teck Resources Ltd. - turning it from a likely bankruptcy to the biggest turnaround stock on the Toronto Stock Exchange: from a low of $3.35 to a 2009 high of $40.15 (Canadian) with a $1.74-billion (Canadian) investment from the $200-billion (U.S.) China Investment Corp. (CIC). Flush with cash and hungry for resources to fuel its rapidly growing manufacturing sector - currently at a 20-month high - China is buying up Canada.

In the wake of the Teck deal, Mr. Emerson was appointed to a 14-member international committee charged with advising the CIC on future acquisitions, putting him in the thick of the action. He believes there is much for Canada to gain by shifting its focus to China: an alternative to the increasingly protectionist U.S. for our energy and resource products, a vast untapped market of consumers, and of course, importing the Made in China products that combine quality and cost competitiveness.

And, he says "we need to collaborate with China on R&D [research and development] or we will be left in the dust as China drives forward with a science agenda that dwarfs anything Canada can do."

But it goes both ways. "China can benefit from Canada's product and service offerings, as well as our strategic advantages as a highly efficient gateway into the heart of the North American marketplace."

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The investment in Teck, for example, will open the Chinese steel fabrication market to Teck's recently acquired coal resource, the $14-billion (Canadian) acquisition of Fording Canadian Coal Trust that just about sank Teck under a mountain of debt, but now looks like the key to its future prosperity.

The Teck deal is just one of three this year indicating that China is ready to buy Canadian - and Canada is ready to let itself get bought.

In the week before New Year's, a Chinese consortium bought Vancouver-based Corriente Resources Inc. , which owns copper deposits in Ecuador, for $679-million. The deal demonstrates just how determined China is to secure raw materials - Ecuador is hardly the most stable mining environment on the planet - yet the consortium of Chinese state-owned enterprises pursued the deal regardless of the political climate. Corriente opened the month at $6.46 a share and ended it at $8.53, a cool $2.07-a-share gain (or a rise of 32 per cent), if you're keeping score.

Chinese investors have also been busy in the Canadian oil sands. Once again, undeterred by politics - in this case the politics of carbon dioxide - Petro-China acquired 60 per cent of two properties from the Athabasca Oil Sands Corp., a private company, for $1.9-billion. The deal has been approved by Ottawa, which bodes well for future deals - it looks as if the federal Conservatives are inclined to park their ideological baggage and do business with the Chinese, regardless of their record on human rights.

Resource companies aren't the only beneficiaries of Chinese growth. Bombardier Inc. , the Montreal-based aerospace and rail company, certainly has, despite its troubled aerospace division. Too often overlooked is Bombardier's rail transport success, in particular a $4-billion deal earlier this year to provide 80 high-speed trains to China. Bombardier, a perpetual Dog in the Globe and Mail's Stars and Dogs stock column, has nonetheless doubled its share price since it hit rock bottom at $1.87 (Canadian) in 2005, but it has a long way to climb back to its September, 2000, high of $26. Perhaps China can help. China is determined to link its cities with high-speed passenger trains, and Bombardier sells the world's fastest, clocked at 347 kilometres per hour.

China's economic success is reflected in its stock market - when the decade started, the Chinese market (not counting Hong Kong), ranked 43rd in the world, smaller than Poland's, according to the New York Times. Now its market capitalization ranks ninth. Interestingly, Canada's market more than doubled in that period, making it, along with Australia, the best performer among the developed nations.

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So resource-rich Canada and market-rich China are a marriage made for the next decade - if the two nations can leave politics out of the pre-nup.

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