CHINA IS POISED TO RIVAL
THE U.S. AS CANADA'S MOST
FAVOURED ECONOMIC FRIEND
AND POLITICAL WHIPPING BOY

By Arthur Johnson

Illustration by Zela Lobb

THE U.S. ECONOMY is not in great shape, which should be worrisome for Bay Street’s bankers, investment houses and fund managers. But instead of obsessing about the enormous debt levels and growing pessimism among consumers south of the border, the people who pull the levers of Canadian finance are positively gloating about the prospect of an economic boom at home for years to come.

It’s not that Canada has miraculously achieved self-sufficiency, but rather that the United States, which has always cast a long shadow over every aspect of Canadian life, is rapidly being overshadowed itself by China, the new global giant. In its frenzy to industrialize, China has become a major customer for almost everything Canada produces, including wheat, nickel and oil. What’s more, a growing middle class in China is creating huge new markets for Canadian insurers, home builders and dozens of other companies.

Indeed, Canada is in the enviable (and rare) position of facing a decade ahead in which our economic growth may well outpace that of our far more powerful southern neighbour.

Given its size and appetite, China has the power to reshape trade patterns, consumer choices and entire economies around the world, including Canada’s. The Earth Policy Institute, a U.S. think-tank that tracks global social and economic trends, reports that China’s consumption of meat, grain, coal and steel already exceeds that of the United States, and its use of oil has doubled since 1994, while that of the U.S. has grown by just 15 percent. Just as significantly for Canada, it’s also the world’s biggest buyer of copper and aluminum, and uses twice as much fertilizer as the U.S. Within 10 years, according to the World Bank, China’s share of global trade will equal that of the United States. What’s more, China is on track to become the world’s largest economy within 30 years.

China’s exports are almost entirely generating this impressive growth. If you’ve shopped recently for a DVD player, a TV or, for that matter, just about any other piece of home electronics, you’ve experienced the tremendous impact that China has exerted on manufacturing. The city of Shunde, for instance, now produces 40 percent of all the microwaves sold worldwide. Thanks to a huge and extremely low-cost workforce, China is able to make thousands of items so inexpensively that prices have plummeted. It’s now possible to buy a pretty good TV made in China for not much more than $100, or a DVD player for $50 or less. That’s a fraction of the retail price just 10 years ago. Whether or not economists have started to track this yet, it’s clear that Chinese manufacturing is actually helping to damp down inflation in Canada.

On Bay Street, the orientation is already starting to shift from the U.S. to China. To get the attention of foreign investors, Canadians have for decades been accustomed to describing their country as a play on the North American (read: U.S.) economy. But when Bill Downe, deputy chairman of BMO Financial Group, appeared at an investment forum in Switzerland in January, he pitched Canada as a safe, secure way for investors to reap the rewards of the booming Chinese economy. Downe described China as Canada’s second-largest trading partner, after the U.S., and said China has purchased $6.5 billion worth of Canadian exports in the first 11 months of 2004.

“For years, European investors have been able to use Canada as a North American play, with a separate currency,” Downe told his audience at the Canadian-Swiss Association in Zurich. “But now they can also use Canada as a China play, on the strength of China’s voracious demands for Canadian commodities.”

Inco, Canada’s nickel-mining giant, is one of the main beneficiaries of that vast appetite. In February, Inco announced that thanks largely to China, its 2004 profit was the largest since 1989 and the company doubted that production in 2005 would be able to keep pace with demand. In fact, the company estimates that China’s increasing demand for nickel each year will be equal to the entire production of 50,000 tonnes expected from Inco’s new Voisey’s Bay operation in Newfoundland and Labrador.

With the rise of China as an economic power, Canadians now have a new focus for some of their resentments and insecurities. Back in the 1970s, a nationalist movement raised alarms about extensive U.S. investment in Canada, which prompted the Liberal government of the day to introduce strict protectionist measures, including the Foreign Investment Review Agency. The Mulroney Conservatives later repealed these.

When Chinese officials expressed interest last year in making sizable investments in Canadian companies, particularly in the energy sector, Paul Martin’s Liberals began to sound like they didn’t entirely approve. “We would probably want to ensure that these companies were open and transparent and, ideally, continue to be publicly traded,” federal Energy Minister David Emerson said in January. Later, he added that the government would “have to ensure — particularly in the case of non-renewable resources—we’re not just willy-nilly unloading our natural resources without ensuring full benefits to Canada as a result.” Canada’s chilly attitude didn’t seem to faze Chinese officials, who continue to express interest in kicking the tires in the oilpatch.

In China, Canada may have found the perfect replacement for the United States — a country big enough and hungry enough to eagerly consume everything that it produces — and broad-shouldered enough to shrug off Canadians’ resentments and insecurities.

Arthur Johnson is a former editor of Canadian Business magazine and has written
extensively on the Canadian financial system.