Inside a factory producing wind turbines in Baoding City near BeijingSean Gallagher Photography/The Globe and Mail
China's strong growth and insatiable demand for commodities has become a crucial driver of the slow but steady recovery of the Canadian economy - and a positive outlook for Canadian corporate profit and job growth.
But if China's manufacturing engine slows markedly because of aggressive inflation-fighting policies or weakening global demand, it would take a heavy toll on the strongest segments of the Canadian economy: resource producers and the manufacturing, equipment, financial and transportation businesses that have been reshaped to meet their needs.
This is no idle concern, despite upbeat reports that China can and will keep its double-digit growth story aloft for several more years, as it makes the difficult transition to an economy focused more on domestic consumption and the development of its feeble service sector.
Some disquieting signs have surfaced. For instance, manufacturing in China has fallen to a 10-month low, according to the latest survey of purchasing managers. As well, Hong Kong has just turned in dramatically weaker-than-expected trade numbers for April. Total exports grew by only 4.1 per cent from a year earlier, far below the consensus forecast of 18 per cent. Imports expanded 6.1 per cent, compared with 20.7 per cent in the first three months. Nearly half of Hong Kong's trade runs through mainland China.
It may be too early to declare that the Chinese train has moved on to a slower track. Japan's supply disruptions may be at the root of the slowdown. But all indications point to slower output amid rising costs, tighter lending constraints and falling profits.
The effect on Canada could be far worse than we realize. Our ever-increasing reliance on resources leaves us only slightly less vulnerable than Hong Kong to a major Chinese retrenchment. True, we have a far bigger trading relationship with the United States, but prospects south of the border depend heavily on increased consumer spending, which will only happen if the battered housing sector stabilizes and employment prospects improve. Even then, a strong Canadian dollar stands in the way of much progress on that front.
At a time when Canada's consumer goods and other manufacturing have taken a terrible pounding, we have become ever more dependent on exports of energy and base resources. So much so that we need to constantly monitor China's economic indicators - not those of the United States - if we want a reasonable gauge of our national prospects. This trend will become more pronounced as Canadian consumers tighten their belts this year, in the face of higher interest rates and increased worries about record levels of household debt.
Here's a telling number: Among publicly traded Canadian companies across all industry sectors, mining and oil and gas producers accounted for more than a quarter of total profit last year and about a fifth of revenue. Oil and gas alone delivered 16.5 per cent of the profit pie, up from just under 13 per cent in 2009. A decent sustained spike in prices could result in a substantially better showing this year. But only if the Chinese do their part to keep the global economy chugging along.
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