Economy

How Will a Chinese Financial Crisis Impact the World?

Published

1 year ago

August 22, 2023

The economic travails of the postpandemic years have led to intense intellectual and policy debates. One thing almost everyone agrees on, however, is that the post-Covid crisis bears very little resemblance to the global financial crisis of 2008.

So, sure enough, China — the world’s biggest or second-biggest economy, depending on how you measure it — seems to be teetering on the edge of a crisis that looks a lot like what the rest of the world went through in 2008.

I’m not confident enough in my understanding of China to judge whether it will manage to contain its Minsky moment, the point at which everyone suddenly realizes that unsustainable debt is, in fact, unsustainable. In fact, I’m not sure if anyone — including Chinese officials — knows the answer to that question.

But I think we can answer a more conditional question: If China does have a 2008-style crisis, will it spill over in a major way to the rest of the world, the United States in particular? And there the answer is pretty clearly no. Big as China’s economy is, America has remarkably little financial or trade exposure to China’s problems.

Before I get there, let’s talk about why China in 2023 resembles the North Atlantic economies, both America and Europe, in 2008.

The 2008 crisis was brought on by the bursting of a huge, trans-Atlantic housing bubble. The effects of the burst bubble were magnified by financial disruption, especially the collapse of “shadow banks” — institutions that acted like banks, created the risk of what amounted to bank runs, but were both largely unregulated and lacking the safety net provided to conventional banks.

Now comes China, with a real estate sector even more swollen than those of Western nations in the run-up to 2008. China also has a large, highly troubled shadow-banking sector. And it has some unique problems, notably huge debts owed by local governments.

The good news is that China isn’t like Argentina or Greece, nations that owed large sums to foreign creditors. The debt in question here is, in essence, money China owes to itself. And it should in principle be possible for the national government to resolve the crisis through some combination of bailouts of debtors and haircuts for creditors.

But is China’s government competent enough to manage the kind of financial restructuring its economy needs? Do officials have sufficient resolve or intellectual clarity to do what needs to be done?

I worry especially about that last point. China needs to replace unsustainable real estate investment with higher consumer demand. But some reporting suggests that top officials remain suspicious of “wasteful” consumer spending and also balk at the idea of “empowering individuals to make more decisions over how they spend their money.” And it’s not reassuring that Chinese officials are responding to the potential crisis by pushing banks to lend more, basically continuing along the path that got China where it is.

So China may have a crisis. If it does, how will it affect us?

The answer, as far as I can tell, is that America’s exposure to a potential China crisis is surprisingly small.

How much has the United States invested in China? Direct investment — investment that involves control — in China and Hong Kong is about $215 billion. Portfolio investment — basically stocks and bonds — is a bit more than $300 billion. So we’re talking around $515 billion in total.

That may not sound like a small number, but for an economy as big as ours, it is. Here’s one comparison. Right now, there are many concerns about U.S. commercial real estate, especially office buildings, which probably face a permanent reduction in demand because of the rise in remote work. Well, U.S. office buildings are currently worth about $2.6 trillion, or around five times our total investment in China.

Why has a huge economy attracted so little U.S. investment? Basically, I’d argue, because given the arbitrariness of Chinese policy, many potential investors fear that the nation may be a kind of Roach Motel: You can get in, but you may not be able to get out.

What about China as a market? China is a huge player in world trade, but it doesn’t buy much from the United States — only about $150 billion in 2022, less than 1 percent of our G.D.P. So a Chinese slump wouldn’t have much direct effect on demand for U.S. products. The effect would be larger for countries that sell more to China, like Germany and Japan, and there would be some ricochet effect on America via sales to these countries. But the overall effect would still be small.

A Chinese economic crisis might even have a small positive effect on the United States, because it would reduce demand for raw materials, especially oil, and as a result possibly reduce inflation.

None of this means that we should welcome the possibility of a Chinese slump or gloat over another nation’s troubles. Even on purely selfish grounds, we should worry about what the Chinese regime might do to distract its citizens from domestic problems.

But in economic terms, we seem to be looking at a potential crisis within China, not a 2008-style global event.

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Economy

Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

Published

2 days ago

November 8, 2024

Anne Joseph

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.

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Economy

Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

Published

3 days ago

November 6, 2024

Anne Joseph

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.

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Economy

Trump’s victory sparks concerns over ripple effect on Canadian economy

Published

4 days ago

November 6, 2024

Anne Joseph

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.

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