CBoC Report: Canadian Exports to China to Surge to C$45 Billion by 2025

Posted by david on Nov 23, 2012 in Blog | 0 comments

This week, the Conference Board of Canada (CBoC) came out with its latest study projecting Canadian exports through 2025. “What Might Canada’s Future Exports Look Like?” rests on a number of basic (and alternate) assumptions about GDP growth and exchange rate fluctuations of Canada’s key trading partners.  In this post, I will take away the most relevant parts that deal with Canadian exports to China.

The CBoC sees China’s GDP growing at around 6.5% over the long term if China experiences a ‘soft landing’ but could tumble to 3-4% if it is hard one.  This assumption is more conservative than the 7% to 7.5% growth forecast by many Chinese and foreign economists.  A recent study by the Development Research Center under China’s State Council forecasts an average of 8.1% for the decade through 2020 and somewhat lower growth in the 2020s.  Perhaps more important, the research argues it will take less time for China to stride the so-called ‘middle-income trap’ (5 years between 2021-25) than it took for Korea, Hong Kong, Singapore, and Japan to huddle it (7-12 years).

CBoC agrees that China is not about to experience a ‘hard landing’ triggered by a major housing market collapse for a number of reasons: 

–          1/3 of Chinese homes are purchased with cash

–          down payments average between 25% and 50%

–          mortgage loans constitute only 15% of GDP as compared to 65% in the US

–          only 6% of overall bank loans go to property developers

–          the largest banks are state-owned (smaller banks are shareholding entities with government institutional participation)

–          and bank credit as a share of GDP has remained the same since 2003

As for the Canadian Dollar versus the Chinese RMB, CBoC expects the Chinese currency to appreciate against the Loonie to stabilize around $1: 5 RMB by the late 2010s into the early 2020s.  One reason is that the Chinese government will continue to be under heavy political pressure from the US, EU and other major trading partners to increasingly allow market mechanisms to determine the Yuan’s value.  An appreciating RMB is a boon for Canadian exports as it spurs consumer spending, especially for imported goods and services. (In 2011, Industry Canada statistics show that raw materials – pulp, minerals, wood, mineral fuels, and oil seeds – made up Canada’s top five merchandize exports to China.)

Given these assumptions, CBoC expects Canadian exports to China hit C$45 billion by 2025 from $15 billion last year, representing nearly 8% year-on-year growth over 14 years.  China’s share of Canadian merchandize exports would more than double from 3.3% in 2010 to 6.8% which would make China Canada’s second biggest export destination, trading places with the UK. 

For Canadian merchandize exports, a 1% increase in China’s GDP translates into a 1% increase in demand for Canadian products.  So, if the Chinese economy expands faster than the report’s assumptions which may well be the case, Canadian exports to China would surge, putting into jeopardy Canada’s ability to meet Chinese demand over the long term. 

In addition, export of Canadian services to China increases substantially to over 3% of total exports during the forecast period, reflected in increasing numbers of Chinese tourists and students and with huge potential for certain parts of the financial sector.

Sarah Kutulakos, executive director of the Canada-China Council, cited recently in the Globe and Mail, urged Canadian companies to make more of an effort to break into carefully targeted Chinese markets with products and services that they excel at such as financial services and clean tech.  “We need to position ourselves in the near-term to meet existing Chinese needs, such as insurance products and pension plans for an enhanced social safety net. Getting in on the ground floor of those reforms could be very lucrative”, she underscored.   

It is also interesting to note that while Canadian merchandize exports to the US will continue to grow by nearly 2% annually over the forecast period, the share of exports to US will drop from 74.9% in 2010 to 68% by 2025.

Canada’s Top 10 Trading Partners in 2010

Source: Wikipedia

Canadian exports are very sensitive to US GDP growth as a 1% drop in US real GDP results in roughly a 2% decline in growth of merchandize exports.  So, if the US Congress fails to address the ‘fiscal cliff’, not to mention start to rein in its 100% of GDP national debt, GDP growth in the US could slump to well below the study’s assumption of long-term 2.5% growth.  Needless to say, that would spell calamity for Canada goods south of the border.