Why Canadian Investors Should Care About China's Slowdown

With Canada's central bank likely to raise interest rates again in September and trying to cool the economy,the Chineseauthorities face an entirely different problem. I'm here. It's slowing growth.

For Canadians sick of inflation, China's economic problems may seem like a world away, but keep an eye out on the other side of the Pacific. It is beneficial for investors to keep it, he said, Cyrus Kanga. , British He was a lecturer at the School of Business at Camosun College in Victoria, Columbia and a former stock trader at CLSA, a Hong Kong-based brokerage firm.

“The (Chinese) economy has driven the world for the last 10 to 20 years. Investors here should be paying attention.”

Analysts and institutional investors say China is the world's second largest economy and Canada's second largest trading partner. The slowdown will have global ripple effects, he said. Even investors focused on Canadian stocks and mutual funds may find themselves exposed to unexpected risks.

Read More: China Talks to US stop. What does this mean for Canada?

“Given the importance of China from a trade perspective, it is necessary to take into account China's exposure to the various countries with which it trades and the impact China has on those countries. There is," said Sandy McPherson. Chief Investment Officer of the City of Edmonton, which invests in Chinese companies.

McPherson sees Canada's exports to China as an important indicator of the health of the Chinese economy. China's record trade surplus with global partners last month shows not only the rise in exports from China, but also that a weak domestic economy is holding back demand for imports.

Lockdown pressure

After years of stringent measures to curb the spread of COVID-19, Chinese consumers are reluctant to spend factory output is growing more slowly and investment from firms not owned by the new nation is drying up.

Controlling COVID-19 brought China's largest city to a standstill for two months earlier this year, and citizens across the world's most populous country were warned by local authorities about the small outbreak. Even if there is, they are cracking down, so the tension continues. Japanese securities firm Nomura calculated that about 80 million people in 22 cities, accounting for 8.8% of China's economic activity, were under full or partial lockdown as of Monday.

On Monday, China's Bureau of Statistics said the control of COVID-19 had helped push the youth unemployment rate to nearly 20 percent in July. rice field. This is his highest rate since January 2018, when the data became available. About a quarter of China's entire economy is suffering. Demand for new homes is slowing. Developers struggle with growth fueled by years of debt.

In a sign of how bad things are going,a recent viral videoshows a local official in the mountainous region of southern Hunan telling attendees at a real estate exhibition to Support the market proactively. "If you buy one property, buy a second. If you buy two, buy a third. If you buy three, buy a fourth." 54}

At the same time, Beijing's intervention in high-handed tech companies such as Tencent and Alibaba sent stock prices to the ground, while unlisted TikTok owner ByteDance traded at a valuation of at least 25. 100 percent lower than last year in private markets, as reported by Bloomberg. Add to that the ongoing trade war with the United States and a real war for Beijing's control of the democratically controlled island ofTaiwan

READ MORE: Fear of Rising Inflation. interest.

Josh Sheng, Chief Investment Officer of Shanghai Tongshengtonghui Asset Management Co., said the deteriorating relationship between Beijing and Washington, D.C. was "first and foremost" among domestic investors' concerns. said there is. The two countries continue to engage in a four-year worsening trade war that began during the Trump administration.

A recent visit to Taiwan by U.S. House Speaker Nancy Pelosi, seen by Beijing as a provocation to its sovereignty claims, has further escalated tensions between the world's superpowers, and the spread to the market.

"Markets feel uncertain about potential actions by (U.S. President Joe) Biden and his administration against China."

China's CSI 300 stock price The index, which tracks shares in China's two largest exchanges in Shanghai and in the southern technology hub Shenzhen, has fallen more than 7% in July, and about 15% in China. year to date. By contrast, Canada's TSX index, which rose sharply in July, has fallen about 5% over the past eight months.

The Chinese market may be feeling the pain. Five of China's largest state-owned companies announced last week that they would be delisted from the New York Stock Exchange, reflecting instability in U.S.-China relations and disagreements over audit rules, while others continued to hold American Depositary Receipts. (ADR) in the United States. ).

But more investors, especially those not buying Chinese assets, still have significant exposure. There is a possibility that According to its latest annual report, as of March 2022, 10% of the Canada Pension Plan's net assets will be denominated in Chinese yuan, roughly equivalent to its combined exposure to Euro and British Pound assets.

Individual Canadian companies may have closer ties to China than many investors realize. Vancouver's Tech Resources said in its 2021 annual report that revenue from China will exceed her $4.6 billion, making up more than a third of his total annual revenue.

When investing in Canadian companies, "the average person doesn't think much about where their income comes from, especially from a Chinese perspective," said Kanga. You may be investing in China, but you don't know it."

Relieving Pressure.

The Chinese market has performed poorly this year, but there is some hope for recovery. Zheshang Securities analyst Zhang Yanbing said China's domestic market was stable in August, with stocks making up more than half of the previous month's losses.

“As COVID control becomes more precise and normalizes, impacts and economic resistance will wane. There is still ample policy space to support

showing that "policy space" and efforts by the Bank of Canada and the US Federal Reserve to cool down economic activity and By contrast, China's central government has made a surprising move this week by cutting key lending rates as banks try to revive the economy.

READ MORE: China conducts new military exercises near Taiwan as US lawmakers visit Taiwan

According to Goldman Sachs, China is the only Asian market where China is easing monetary policy, and China's annual growth rate is expected to rebound sharply in the third quarter ending September. Some investors say policy easing in China and tightening in other countries could present attractive investment opportunities.

"Fundamentally, from an investment perspective, you have to be there," said McPherson, noting that Edmonton has its 5% allocation to emerging markets, among which China He added that it made up the "most part."

Focusing solely on the Canadian market means missing out on investment opportunities, while at the same time increasing exposure to country-specific risks, Kanga said, adding that Canadian investors' strong You mentioned home market bias.

"I think investors need to get out of their comfort zone a little bit," he said. “You have to be long-term and diversify. There are a lot of opportunities and a lot of growth happening overseas.”