China is the world’s biggest emerging economy and second largest economy. So when the Chinese economy stumbles, its currency tanks, and stock market plunges, the effects are felt around the world. With an economy that is limping along at its slowest pace in a quarter of a century, the Chinese economy will have a lasting impact on the North American economy—and the stock market.
China Propels Global Economy during Financial Crisis
During the financial crisis in 2008 and 2009, as the U.S. economy spiralled, the stock market plunged and the Canadian economy slowed considerably, economists and investors around the world looked to the Chinese economy to carry global growth.
Before the financial crisis, China’s Gross Domestic Product (GDP) growth averaged around 13.0%. During the same time, the U.S.—the world’s biggest economy—was reporting annual GDP growth of around 2.2%. The Canadian economy was doing marginally better with annual GDP growth near 2.4%.1
At the height of the financial crisis, the Chinese economy continued to do well with GDP growth of 9.6% in 2008 and 9.2% in 2009. By contrast, Canadian GDP stalled at 1.2% in 2008 and slid into a recession in 2009 with GDP of -2.7%. It was worse in the U.S. where the economy fell -0.3% and -2.8% in 2008 and 2009 respectively.
A lot has changed since then. The U.S. economy has rebounded to some extent, the Canadian economy is weak, and the Chinese economy is limping along. Chinese GDP is expected to slow to 6.3% in 2016 and 6.0% in 2017. This might sound good compared to U.S. GDP, but it’s a sharp slowdown from previous years and the slowest growth projections in 25 years.
Because of the slowdown in the Chinese economy, the International Monetary Fund predicts the global economy will grow just 3.4% in 2016 and 3.6% in 2017. That’s down 0.2% from previous estimates.2
This is bad news for the North America economy and stocks since we rely increasingly on China for imports and exports.
Effect of the Chinese Economy on Canada
Canada and the U.S. may share the world’s longest border, but Canada’s economy relies more heavily on China than the U.S.
A strong Chinese economy and rising imports and exports translates into higher investment in Canada and increased demand for goods and services. This also means increased employment, additional taxes in the government’s coffers, and increased government spending.
A weakening Chinese economy has the reverse effect. And has a significantly negative impact on commodities and oil prices. That’s because China has an insatiable appetite for Canadian natural resources. This, combined with a stronger Canadian dollar, makes it more difficult to compete.
In 1997, China accounted for just 0.7% of Canada’s exports and 1.9% of imports. Today, China’s bilateral trade with Canada is roughly 10 times what it was in 1997.3 Where it was once said, “as the U.S. goes, so goes Canada,” today, it’s “as the U.S. and China go, so goes Canada.”
If the Chinese economy continues to cool, the effects will be felt coast to coast in Canada and will drag the stock market down with it.
Effect of the Chinese Economy on the United States
Next to the U.S., China is the second largest economy. The two countries are massive trading partners and, like Canada, their economies are intertwined. As a result, there is growing fear that what is happening to the Chinese economy will have a ripple effect on the U.S. economy and disrupt the stock market.
In 2013, China became the world’s largest exporter.4 According to the most recent data, in 2014 China exported $2.34 trillion of its production. That’s more than the EU ($2.17 trillion) and the U.S ($1.63 trillion).5
China is also one of the largest holders of U.S. Treasury bill, bonds, and notes. As America’s largest banker, China owns more than $1.25 trillion in Treasures. That’s around one fifth of the public debt held by foreign countries.
China purchases U.S. debt to support the value of the U.S. dollar. It also helps China peg the yuan to the U.S. dollar, allowing it to devalue its own currency to keep its exports competitive.
In 2015, China’s holdings fell by around $200 billion as it tried to raise money to kick-start its floundering economy and flagging stock market. On top of that, the country also lowered its interest rate five times.6
Despite weak economic growth in China and a floundering global economy, the Chinese government insists doomsayers are underestimating its ability to balance growth with reform. These assurances haven’t translated into earnings and revenue growth for publicly traded companies in Canada or the U.S. nor helped global stocks rebound.
What it has done is open up a window of opportunity for investors who have a strong understanding of investing strategies that can help them profit no matter what the stock markets are doing.
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- “GDP Growth (annual %),” The World Bank web site, last accessed March 16, 2016; https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?page=1.
- “Subdued Demand, Diminished Prospects,” International Monetary Fund web site, last accessed March 16, 2016; https://www.imf.org/external/pubs/ft/weo/2016/update/01/.
- Drummond, D. and Clemens, K, “The Impact on Canada of the Rise of the Chinese Economy: Good, Bad or Indifferent?” Queen’s University School of Policy Studies last accessed March 16, 2016; https://www.queensu.ca/sps/sites/webpublish.queensu.ca.spswww/files/files/Publications/workingpapers/50-Drummond-Clemens_2014_Canada-China.pdf.
- Monaghan, A., “China surpasses US as world’s largest trading nation,” The Guardian web site, January 10, 2014; https://www.theguardian.com/business/2014/jan/10/china-surpasses-us-world-largest-trading-nation.
- Amadeo, K., “China Economy: Facts, Effect on US Economy,” About News web site, last accessed March 16, 2016; https://useconomy.about.com/od/worldeconomy/p/China_Economy.htm.
- Kruger, D., “China’s Selling Tons of U.S. Debt. Americans Couldn’t Care Less,” Bloomberg Business, October 18, 2015; https://www.bloomberg.com/news/articles/2015-10-18/china-s-selling-tons-of-u-s-debt-americans-couldn-t-care-less-.