The extreme heat engulfing parts of China is a painfully apt metaphor for the economic temperature in Beijing.
The headlines of recent days can smack of cooling. Case in point: Asia’s biggest economy grew just 0.4% in the April-June quarter from a year ago. It was below forecasts of 1% and a world away from the 5.5% 2022 target.
But it’s the overheating risks emanating from China’s debt markets that are dominating investors’ attention. Some of the most extreme heat is being felt by China Evergrande Group and other property developers facing a mutiny among homeowners.
The problem: many Chinese took out huge mortgages for properties that remain unfinished. Homebuyers are either refusing to make payments or threatening to. This bubble has a number of economists worried China is giving off strong Lehman Brothers vibes as growth grinds to a halt.
Minxin Pei, China expert at Claremont McKenna College notes that confidence in the stability of mainland banks has been “badly shaken” by the failure of several small banks in Henan Province in April.
Since 2008-2009, when the Lehman crisis rocked the global financial system, China has been on a debt binge to support growth. Lots of it was issued by local governments far away from the real seat of power in Beijing. “Many have wondered how long the party could go on,” Pei explains.
Diana Choyleva at Enodo Economics points to another warning sign that things are amiss the globe’s biggest trading nation: mass bank protests in the city of Zhengzhou, the provincial capital of Henan, in recent months in response to accounts being frozen.
This pushback by “bank depositors demanding their life savings back and condemning government corruption is another manifestation of the huge challenges Beijing faces at present,” Choyleva says. “In China, whose citizens have no chance to express views through the ballot box, domestic bank runs can signal falling confidence in the system Xi tops.”
Clearly, investors betting on Japan-like reckoning in China haven’t made money these last 13-14 years. Time and time again, Communist Party leaders managed to steer China away from the rocks. Beijing did so by pushing China’s debt-to-GDP ratio to the verge of 265%.
Short-sellers who stepped forward to bet against Chinese government debt or the yuan over the last dozen years ended up closing those trades. Here, think hedge fund manager Kyle Bass, founder of Dallas-based Hayman Capital.
But China’s debt challenge is now colliding with two big threats, one from abroad and one homemade.
The first is a global inflation surge forcing the Federal Reserve to make its biggest tightening moves since the early 1990s. The second is President Xi Jinping’s “zero-Covid” lockdowns, which are backfiring—and fast.
For China, any gross domestic product reading under 4% arguably puts the economy in recession territory. Not only is a new Covid-19 wave weighing on China’s outlook, but so is a diminishing returns dynamic that could reduce the power of fresh Chinese stimulus.
More than a decade of generating growth with massive infrastructure projects, many funded at the local government level, has left China with fewer productive projects to order up. Over time, the economic payoff weakens, increasing the costs to broader society.
As Xinquan Chen, economist at Goldman Sachs puts it: “Funds are less of a constraint for infrastructure investment this year, while the bottlenecks lie mainly with project pipelines and government incentives.”
And then there’s Charlene Chu, an economist well known for spotlighting China’s bubble troubles when she was with Fitch Ratings. Now with Autonomous Research, Chu has two big worries about Xi’s economy.
The immediate one is another cycle of Evergrande-like defaults as growth flatlines. The People’s Bank of China could surely try to open the monetary floodgates to avoid contagion. At some point, questions about which companies are too big to fail will pivot to whether they’re too big to save.
The longer-term problem is how debt becomes an intensifying headwind for China’s $17 trillion economy. In a recent appearance on the One Decision Podcast, Chu said “we continue to be in a climate where the Chinese government is growing credit at very, very rapid rates. And longer term, this does have a cost.”
Even if China doesn’t crash anytime soon, Chu says, the debt burden “does start to squeeze overall economic growth. The more you saddle households and businesses with debt the more each dollar or RMB of revenue or income they get from wages is going to repay debt. And that’s not going to consume goods, it’s not going to new capital expenditure to drive growth and business.”
China, Chu notes, “is in a situation now where the debt bubble continues to grow and it is I think one of the structural issues that is weighing on Chinese growth.” She adds that it’s “one of the reasons why we think we are entering an area here where we are going to be looking at low to mid-single-digit growth in China at best as the country really starts to slow down from this.”
Many bearish short-sellers will attest that Xi’s government is skilled at confounding the naysayers. Yet his financial rescue team really has its work cut out as Lehman comparisons make the rounds in investment circles.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.