China’s economic slowdown a threat to Canada – by Michael McCullough (Canadian Business Magazine – June 11, 2012)

Founded in 1928, Canadian Business is the longest-publishing business magazine in Canada.

More than you probably realize, Canada’s future prosperity rests on the outcome of a political thriller unfolding an ocean away.

This much we know. On March 15, one of the contenders to become China’s president for the next decade, Bo Xilai, was sacked as the Communist Party boss for Chongqing, an inland megalopolis with a population roughly equal to Canada’s. Not only that, he was kicked out of the 25-member Politburo and thus out of contention to join the nine-member standing committee—the executive body that really runs China—at the end of this year.

Not long after, Bo’s wife, Gu Kailai, was charged with last November’s suspected murder of a British businessman, Neil Heywood. Bo and Gu had been China’s most potent power couple, offspring of revolutionary heroes and renowned for fighting organized crime. Their revival of Mao-era patriotic songs was a callback to the country’s past—yet they had a son at Harvard known for driving a Ferrari.

The rest of the tale is hearsay: that a heavily indebted Heywood, a former family friend and fixer who had helped get Bo junior into Harrow (Heywood’s prestigious alma mater in England) had demanded a bigger cut of a business deal; that he threatened to expose underhanded dealings by Gu if he didn’t get it; that Bo’s police chief, Wang Lijun, had confronted him over the alleged murder (the death was originally put down to alcohol poisoning), after which Wang sought asylum at an American consulate; that Gu had shown up at a police station in a People’s Liberation Army major-general’s uniform to announce that she was under special orders from Beijing to “protect” Comrade Wang; that the couple had plotted to assassinate Wang and came up with three separate storylines to avoid being implicated.

What we in the West definitely don’t know is the current location of Bo or Wang, what repercussions will be felt by Bo’s powerful allies in politics, business and the military (the Financial Times reported May 14 that Bo’s mentor and standing committee member Zhou Yongkang had been relieved of his duties as head of China’s police, courts and spy apparatus), and who is going to lead China for the next 10 years, let alone what their policy leanings may be.

Whether the stories about the Bo family are true or the embellishments of political rivals, neither scenario inspires confidence in China’s leadership and system of governance. There is little interest in trying to expose the objective truth, exonerate the innocent or punish the guilty—whether justice will be served doesn’t even enter into the equation.

Indeed, this story of intrigue might be just a salacious distraction were it not taking place at the top of the ruling class of China, which will likely be the world’s largest economy by the end of the decade and a place upon which Canada’s fortunes increasingly hinge. Where Canada’s economy used to move in lockstep with that of the United States, today it is China that most strongly influences things like commodity prices and the value of the Canadian dollar.

In the aggregate, that ought to be good for Canada, especially when you compare the robust economic growth projections in China versus the anemic U.S. But that greater opportunity comes with greater risk. To the degree that we produce and sell commodities that China wants to buy, we will likely come out ahead in the long run. Amid the uncertainties around China’s political succession, its bubblicious housing market, its unaccountable state-owned enterprises and its aging population, we may be in for a bumpy ride.

“We need to know what we’re getting into,” warns Wendy Dobson, a professor at the Rotman School of Management at the University of Toronto who has written extensively on China. Not that we have a choice; our increased exposure to emerging-market economies is inevitable, she says. China’s power struggles are no longer the subject of idle curiosity, but a potential threat to our well being.

For almost a decade, economists have noted the growing influence of China over Canada’s economic fortunes. In a 2007 report, “Not Dutch Disease, it’s China Syndrome,” Statistics Canada macroeconomic analyst Ryan Macdonald demonstrated how the integration of emerging economies, most notably China, into the global economy played a leading role in Canada’s improving terms of trade since 2003. What was happening 10,000 kilometres away boosted demand for commodities including oil, minerals and food. It was not, as politicians including Thomas Mulcair and Dalton McGuinty have argued, a case of “Dutch disease”—that implies the discovery of a low-cost resource like the Netherlands’ natural gas finds of the 1960s that ended up rendering the country’s other industries uncompetitive—but rather the increased demand for things we already produced that was reconfiguring the Canadian economy. It didn’t matter that Canada did not actually export many of these products, including oil, to China; demand growth there affected prices worldwide.

This rise in commodity receipts created a cascade of mostly beneficial effects for Canada. Resource industries enjoyed higher profits and a wave of investment. Real personal incomes rose, which in turn created higher domestic demand for goods and services. Rising demand in Canada meant increased employment in service industries and certain manufacturing industries, higher government revenues and spending. The increased manufacturing capacity in China and other emerging markets brought a decline in the price of most imported consumer goods. This, combined with a rising Canadian dollar, also made it harder for Canadian manufacturers of consumer products to compete. But total manufacturing output in Canada actually rose 1.3% between 2003 and 2006, Macdonald noted. On balance, Canada was richer as a result.

Since that report came out, we can count another upside to the “China syndrome”: Canada weathered the recession better than just about every other developed economy, thanks in part to a quick recovery in emerging economies and thus in commodity prices.

For the rest of this article, please go to the Canadian Business Magazine website:–china-s-economic-slowdown-a-threat-to-canada