China's leaders are positioning the country for a new era of lower, single-digit growth led more by consumer spending. That reshuffles the lineup of suppliers to the world's second-largest economy and appears set to push Canadian commodities producers to the margins.
"The commodities super cycle – I don't know if it's over, but it's not looking as good as it used to and it's going to hurt a major part of our economy," said Yuen Pau Woo, president and CEO of the Vancouver-based Asia Pacific Foundation of Canada. "We did less badly out of the global recession of 2008-09 on the back of Chinese demand for commodities. That honeymoon is over."
As demand for resources moderates, Mr. Woo warns that Canada needs to strike a trade agreement with China and better promote its banks, automotive sector and other products that don't depend on construction.
China's leaders have been warning its companies for much of the past decade about their over-reliance on infrastructure investment and the need to prepare for a shift to consumer-led growth.
Last week, China's government acted by announcing an end to some government-determined interest rates and warning that further rate reforms "will be more profound." Analysts say this direction points toward the end of easy credit for China's manufacturing and construction sectors.
China's economic growth held at 10 per cent or above for seven of the past 10 years, according to World Bank data. Macquarie Group Ltd. said in a report released Wednesday that its researchers have lowered their 2013 and 2014 China growth forecasts to 7.3 per cent and 6.9 per cent, respectively, partly because "the peak of investment spending has likely passed."
Much of that investment went into roads, bridges, factories and ports, all of which helped propel China's economic ranking past the U.K., Germany, and Japan within the past decade. It also required commodities like coking coal, a key steel-making ingredient, which benefited Canadian commodity producers such as Teck Resources Ltd. The Vancouver-based company ships about 15 to 20 per cent of the 25 million tonnes of coking coal it produces annually to China, according to analysts.
China is undergoing a transformation, Jim McNerney, chief executive of airplane giant Boeing Co. said during a conference call Wednesday.
"I think they have difficulty transitioning their economy right now," Mr. McNerney said. "It's more of a demand driven, consumer-led, domestically driven economy. And that transition is not easy to make from an external investment, foreign direct investment kind of led economy."
Mining companies are already bearing the brunt of slowing demand in China, which consumes about 40 per cent of the world's base metals. Metal prices have dropped amid weakening demand, which has led to a slump in equity prices. Teck's shares, for example, are down by more than a third this year.
"The Canadian market continues to be in a bit of a pickle," said Macquarie Private Wealth Inc. chief investment officer Craig Basinger in Wednesday's note, cautioning investors about China's weaker growth.
"Overall, we are more defensive in the Canadian market given the headwinds to our resource industries and the view the Canadian economy is not as well positioned to benefit from the composition of global growth. The TSX is lacking in a number of our preferred industries including Information Technology and Industrials."
Attention is starting to turn instead to the U.S., which is not only experiencing an economic recovery, but has more industries that will benefit from a shift in China's economy.
For example, Ford Motor Co. said on Wednesday that its second-quarter results were boosted by a strong performance in the Asia-Pacific, including China. Pre-tax profit in the region hit a record, led by market share in China, which grew to 4.3 per cent as Chinese buyers snapped up the compact Focus car and Kuga and EcoSport crossovers.
"Most of the buyers in China are first-time buyers," Ford's chief financial officer Bob Shanks said during a call with investors and analysts Wednesday. "That is one of the great things about our investments there – we are going after first-time buyers. We don't have to steal them, if you will, which is really hard."
Still, some see China's economic readjustment as a positive development.
Economic growth in China is softening from a searing pace in recent years, which is probably healthy for the long-term prospects of the economy, Mr. Shanks said.
Peter Harder, president of the Canada China Business Council, says China's economic shift should be no surprise to industry, but doesn't believe it's commodities versus consumer products in the future race for Chinese demand.
"It's a modulated shift from a unique resource base to a resource and domestic consumer market base," he said.