But if financial companies have peaked, what about a resource sector whose fortunes have come to be closely linked with those of a bunch of Communist policy bigwigs? China’s leaders are plainly worried about slower growth that is draining demand for raw materials, equipment and even consumer goods (Mercedes dealers have been offering big discounts). But the party bosses also welcome the inflation-cooling effects and remain reluctant to launch another big stimulus program, even though they have the fiscal manoeuvring room to spread plenty of renminbi around. In one example of what can happen to resource suppliers when the world’s second-largest economy eases up on the gas pedal even slightly, Chinese customers cancelled a raft of contracts in May for iron ore and thermal coal. Analysts speculate that this was either a response to high inventories and weaker steel demand or a ploy to take advantage of falling world prices. Either way, the producers lose. If Beijing fails to engineer a soft landing—which by Chinese standards would mean annual growth holding comfortably above 7%—the slowdown could turn into a rout.
But how to quantify the potential damage? “The sensitivity of commodity prices to Chinese economic activity is very difficult to discern,” Perkins says. “Because China went on such a binge from 2001 into 2011, it’s hard to say how sensitive prices will be in a slower-growth environment.” Some analysts remain convinced the Chinese leaders are so afraid of unleashing unrest that they will pull out all the stops to keep the economy moving fast enough to preserve existing jobs and add more. “If you are looking for a possible light at the end of the tunnel as far as
Canada is concerned—especially when you consider our relative underperformance to the U.S.—you want to look for signs of a flicker in the Chinese economy,” Rosenberg says. “And I think the sooner that they ease policy dramatically—and they do have the latitude—the more we can see the clouds part.” Société Générale’s permabear strategist Albert Edwards, however, predicts the Chinese will not be able to prevent their version of a crash—with growth falling to 5% or 6%. That doesn’t sound too bad, unless you’re a commodity producer. “Canada might be a lightly done muffin, but Australia will be absolutely toast,” Edwards says of a country whose economy has been largely reduced to one trick.
Canadian oil producers would certainly feel the pain. China has been the world’s leading source of new global demand in recent years, accounting for fully half of the growth in the market—and lately likely more than that, given a dramatic drop in India and a handful of other emerging economies. Now that Chinese industry is shifting to a lower gear, forecasts call for less than a million barrels a day being added to current global consumption of about 89 million. That would be less new demand than at any time in the past dozen years, apart from the depths of the global recession in 2009. Demand in the industrial world has already fallen to the 2009 lows and is expected to shrink further, as U.S. consumption declines and Europe’s economy does an austerity-driven double-dip off the three-metre board. “What happens in Europe really has no bearing on oil consumption growth, because they are a stagnant economy,” says Peter Tertzakian, chief energy economist at ARC Financial Corp. in Calgary. “But if this sizable chunk of the global economy stops spending on Chinese goods, then China slows and demand for oil follows.” All in all, it’s not a pretty picture, suggesting it may be time to find a third act for the Canadian economy before a disappointed investment crowd heads for the exits.
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