In China, Canadian businesses need to think longer term
HSBC’s chief economists for China and Canada argue businesses should ignore the volatility and engage now
Dec 11, 2015 Murad Hemmadi
The rumours of China’s economic demise are greatly exaggerated. That’s the message David Watt, Chief Economist for Markets at HSBC Canada, thinks Canadian businesses need to hear.
China has been the cause of market volatility and lowered outlooks across the world, as the financial community and Western economists worry that the growth of the Chinese economy may slow more sharply than expected. And in an interview last month at the bank’s Toronto offices, HSBC Managing Director, Co-Head of Asian Economic Research and Chief Economist for Greater China Hongbin Qu says that there is indeed cause for concern.
“China does face a slowdown risk and some pretty strong headwinds,” he noted. Exports have been weaker than expected, and manufacturing has slowed in tandem. But Qu believes those troubles don’t amount to all they’re made out to. “I think the worries that the overall economy is going to have a sharper slowdown or a hard landing—there are even some people talking about some sort of crisis in the making—are overblown,” he says.
Both economists say there’s a tendency to overemphasize economic trends and indicators emerging from China. Take the devaluation in August of the renminbi, which was seen as an attempt by the Chinese government to bolster export competitiveness. The overreaction to the renminbi devaluation is perhaps understandable—China’s economy and policymaking bodies remain frustratingly opaque to outside observers. But the size of the change (2%) and the fact that exports are far more sensitive to global demand than exchange rates indicate that the move was about reforming the exchange rate regime to be more market-driven, says Qu, not starting a price war.
Or take the idea that the country is rebalancing from an investment- and export-driven economy to a consumption-driven one. “When people focus on that, they get the impression that the Chinese are not consuming, which is totally wrong,” says Qu. “Chinese consumers are spending money—in fact, it’s already the largest market for many consumer goods.” For example, China overtook the U.S. as the world’s largest auto market three years ago, and its citizens are the top consumers of luxury goods globally.
Canadian firms wait for some sort of grand switch-flipping from export to consumption. “When we think about the global economy, we used to think, ‘What does the U.S. consumer want?’” says Watt. “We have to start thinking, ‘What does the Chinese consumer want?’ because that’s going to be a driver of global trends over the next 30 years.” That applies to all Canadian businesses, not just ones built around consumer products or services. “We have to be in the business of providing parts of the process, of the supply or value chain,” said Watt.
Another Chinese trend that’s been much-covered is urbanization. Each year, some 10 million people move from rural areas of China into the country’s cities, Qu says, and that’s likely to continue until cities reach the 75–80% urbanization rates of countries like Canada (it’s at about 50% now). Much has been made of China’s “ghost neighbourhoods”—areas where building and infrastructure development have run ahead of current demand, leaving apartment buildings and streets empty. “In some small towns you may have buildup ahead of sale,” Qu admitted. “But that doesn’t mean that there will never be people, or that the building will be empty forever.”
Urbanization leads not only to increased consumption, but a more direct source of economic growth. Qu invoked Economics 101: the only sustainable source of growth over time is productivity growth. And there are only two ways to grow productivity: “One is that though the same people do the same jobs year after year, you give them better equipment—that’s innovation,” he explained. “Secondly, and this is more important, you have the labourers shifting from very low-productivity jobs toward the high-productivity jobs.” The shift from rural occupations to factory work or other urban jobs produces a productivity gain of several hundred percent, creating a substantial floor for China’s growth.
Capturing a piece of that growth could be very lucrative, and Canadian companies can do it without having to stretch themselves too much. “You don’t have to service everybody,” notes Qu. “All you need to do is look at your own competitive advantage.” But it’s crucial that businesses put their China plans in place immediately. “Start implementing it tomorrow,” says Watt. “And if something happens in China, like the stock market sells off sharply again, don’t delay it for another six months.”
Although Canada now has a renminbi hub, in Toronto, Watt says Canadian governments could also be doing more. Australia has both a hub and a free trade deal, while the U.K. has been engaging China at governmental, industry and company levels; Qu says breaking ranks with other developed economies to join the Asian Infrastructure Investment Bank “took a bit of bravery” on the part of the British government. While free trade between Canada and China is by no means inevitable, Watt says there’s room for greater clarity on issues like oil sands acquisitions or investment pushing up prices in the Vancouver housing market. “China has indicated, ‘We want more engagement with Canada,’” says Watt. “It’s now up to us to start engaging the other way.”
