Chinese (Economic) Myths and Reality

Shanghai Expo Canada Pavilion by Tom Mascardo
Shanghai Expo Canada Pavilion by
Tom Mascardo

According to Heritage, Chinese state-owned companies have made 103 international investments larger than $100 million in the past six years. They also made many smaller investments and huge infrastructural projects. Chinese investors couldn’t ignore Canada due to its natural resources and attractive business conditions. Chinese investments from 2005 to 2010 in Canada amounted to $10,800 million, according to Heritage’s research.

China’s Expansion: Canada as a Target?

China has great reserves of U.S. dollars accumulated by its massive export of manufactured goods to the West. Therefore, it also need raw materials to feed those factories, and knowing that the price of resources will only grow, Chinese state-owned as well as private companies are buying now, when resources are more affordable.

Canada is an attractive target not only thanks to its supplies, however. “We love Canada for several reasons,” said Gao Xiqing, the president of China Investment Corp (CIC)., the country’s sovereign wealth fund. “The Canadian government over all is a lot more welcoming than most other governments in the developed world.” CIC invested $2720 million in Teck Resources (in 2009) and Penn West Energy (in 2010), Canadian metal and energy companies.

According to Statistics Canada, in 2010, China’s direct investment in Canada reached C$14.1 billion, up from C$12.9 billion in 2009 and C$5.7 billion in 2008. Many Canadians don’t enjoy Chinese interest in their country and are concerned about China taking over the country’s resources, though. When an index of Canadian shares of China-focused companies, excluding Sino-Forest, fell by 15 percent in June 2011, and Rui Feng, chairman and chief executive officer of Silvercorp, reacted: “People got very emotional and started to dump everything related to China.” But the problem of general distrust of China can’t hurt them significantly — at least not now. Marcus Xu, a money manager at Genus Capital Management in Vancouver, believes that the long-term positives of investing in the world’s fastest-growing major economy outweigh the short-term hurdles.

On the other hand, the Canadian government supports Chinese investments as a means for Canada to decrease its reliance on the United States and diversify its market. “Many of the so-called Canadian resource companies are really not Canadian anymore,” Mr. Gao claimed. “I think for us to go in and buy part of it is good for Canadians, you don’t want to be totally dependent on one country. And we’re not going to take over anything, so our getting in is just diversification for the economy.”

Although Chinese investments are so huge, Canadians don’t have any reason to consider themselves a Chinese priority target. In 2010, China ranked seventh in foreign direct investment in Canada, after the U.S., the Netherlands, the UK, Switzerland, France, Switzerland, and Japan.

China’s Economy Has Problems But Not Losing Its Power

China by Dainis Matisons
China by Dainis Matisons

As the 20th century has been called the American Century, and the 19th century the British Century, the 21st century is usually associated with China’s strengthening economy. Its financial strategy has expanded to every corner of the world and as Lawrence Summers, American economist, said: “The dramatic modernization of the Asian economies ranks alongside the Renaissance and the Industrial Revolution as one of the most important developments in economic history.”

With the weakening, indebted economies in Europe and the U.S., it seems that China has a great chance to become the next world superpower. However, Chinese trade is closely connected to the US and Europe, so their problems can affect China as well, and nowadays the country faces own economic troubles. In June 2011, its inflation reached a 34-month record (5.5 per cent annually). Food prices are the biggest factor behind the growth, as they surged by 11.7 per cent in the same month. After three months, inflation slowed only slightly (from 6.2 per cent in August to 6.1 in September).

“For the moment, we remain in policy stasis — no more tightening, but no real loosening — while Chinese authorities nervously eye developments in the eurozone,” said Alistair Thornton, an analyst at IHS Global Insight. And if China responds to the Eurozone request to contribute to the EU Fund, it will gain more influence in Europe.

Rising Inflation: Sign of Slowdown and Losing Power?

In March 2011, Barry Eichengreen, Donghyun Park, and Kwanho Shi from the National Bureau of Economic research wrote, When fast growing economies slow down: International evidence and implications for China. They claim that periods of high growth in late-developing economies do not last forever, and they ask whether we can we say when fast growing economies slow down and when it will happen in China.

International experience suggests that rapid-growing catch-up economies slow down significantly, in the sense that the growth rate downshifts by at least 2 percentage points when their per capita incomes reach around $17,000 U.S. in year-2005 constant international prices, a level that China should achieve on or soon after 2015.

They also add that high growths slows down when the share of employment in manufacturing is 23 per cent and when income per capita reaches 57 per cent of that in the country that defines the technological frontier. China is likely to reach these levels soon.

Is there a possibility that rising inflation is the first sign of Chinese slowdown as they predicted? And what does it mean for the Chinese century? Nothing, the answer, because the crucial question is how much it would slow down. If China’s economy doesn’t weaken rapidly, it will still remain strong, with great investments all over the world, expensive infrastructural projects, and bright prospects almost untouched. If you don’t earn as much as you did yesterday, your wallet can still remain full from previous investments and current cash-flows. Moreover, when we are looking at the world’s economic situation, China doesn’t have many competitors in the position of global driver.

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