Fall of the Great Wall: Canadian firms can realize growth in China

TORONTO—Expanding trade relations with China are bigger than Canada’s recently announced designation as a so-called currency trading hub for the Chinese renminbi, and Canadian companies are faced with tremendous opportunity for growth, according to a pair of experts.

Speaking during a client webinar updating the economic picture in China, David Watt, chief economist with HSBC Bank Canada, said the currency trading hub announcement coupled with new rules governing direct and portfolio investment “set the stage for resetting China-Canada relations” moving forward.

“One of the most important elements is actually the clarity on the approach towards China by the federal government,” Watt said of the evolving relationship with China. “It’s a distinct shift away from the approach over the past few years which has seen China treated with suspicion or as a threat to one that now sees Canada and China’s economic interests aligned.”

That doesn’t mean the relationship between Canada and its No. 2 trading partner will be without its hurdles, but Watt said it will be no different than the occasional tension that flares up between Canada and the United States.

“There’s always going to be some friction, but the idea is that we have now set rules for the relationship between Canada and China in the future that will set the stage for increased trade and, very importantly, increased investment,” he said.

While gauging that boost in investment is difficult, HSBC Bank Canada thinks it has the trade jump pegged—from about eight per cent of total trade in Canada, or $73 billion, to in the neighbourhood of $95 billion by 2018.

China, however, only accounts for 4.3 per cent of Canada’s exports, and where Watt sees opportunity for growth for Canadian exporters is through the currency trading hub designation.

“There is strong potential now for Canada to boost its exports to China and to take advantage of the (renminbi) hub and the decreases in costs that (it) will entail,” Watt said.

With an HSBC survey finding only five per cent of Canadian firms are using the renminbi in trade settlement—the global average is 22 per cent—Watt said more companies need to step up to the plate and reap the rewards that come with Canada’s trading hub designation.

Joining Watt on the webinar was John Zhu, greater China economist with HSBC Global Research, who said currency-to-currency trading is “cheaper for everyone involved.”

“Using the renminbi as an invoicing currency (and) a payment currency will cut … costs,” he said plainly, noting cost savings will be realized by simply cutting out the middleman that is the American dollar.

What’s more, there is talk of discounts being offered to firms willing to complete transactions using the renminbi, making the currency trading hub designation a timely announcement for Canadian firms working in China or looking to take that step in the near future.

Watt called the trading hub designation “crucially important to the future” of the Canadian economy, but said it’s not the only important development between the two nations.

Ratifying the Foreign Investment Promotion and Protection Agreement (FIPA) will also help change the future of the Canada-China relationship, Watt said.

“Canada dragged its feet and did not ratify (the agreement) until September 2014,” Watt said of the FIPA deal that China first signed in the fall of 2012. “This provides the ground rules for dealing with direct investment between Canada and China.”

The bilateral agreement treats Chinese investment in Canada similarly to domestic investment—and vice versa—and bars “arbitrary actions” from either government against potential investment, which Watt called that “an important signal” about future investment.

Zhu and Watt agreed that outward investment by Chinese firms has increased, and Canada can now take advantage under the ratified FIPA, particularly for infrastructure projects.

“Canada needs foreign direct investment, China is very eager to increase overseas direct investment, and now we have ground rules set that will allow greater rules-based treatment of cross-border investment (with China),” Watt said. “It provides an enormous opportunity for Canadian firms and for Canada to take advantage of direct investment from China.”

On a province-by-province basis, Ontario and Alberta stand to gain the most from increased trade and investment with China, according to Watt, as they have been laggard to their neighbours over the years.

In fact, Alberta and Ontario, which together account for some 60 per cent of Canada’s exports, send a meager 3.2 per cent and and 1.2 per cent of their products to China, respectively.

“That is where the key opportunities align going forward,” Watt said of the two powerhouse provinces. “We are going to have to look for the largest producers and the largest exporters in Canada reorienting their focus from north-south into the United States to thinking more broadly about China as an (option).”

It will be critically important for Ontario moving forward, with companies in the province needing to focus on China as an alternative destination to the U.S. for exports as demand there grows static in the medium- to long-term.

“That shows that when we have clarified rules, when we have structure between Canada and China in terms of the relationship—be it on trade or investment—there is great potential to develop more trade and greater links,” he said. “That is what we could potentially see in other sectors—not only in lumber and natural resources, but also with regard to high technology products.”

Talk about the “potential” and “opportunities” is all well and good, but until Canadian companies get over the fear factor that exists when it comes to doing business with China.

Quoting a survey conducted for the Asia Pacific Foundation of Canada, Watt said there has been increasing suspicion of China as a threat rather than an opportunity, and that perception needs to change.

“This is the wake-up call. We need to start seeing China as an opportunity—it’s no longer a threat,” he said. “There’s great potential (and) we need an attitude adjustment to see China as an opportunity rather than treating it (with) suspicion, and we need to get our largest export sectors and our largest provinces to focus on more closely developing those links with China in order to set the stage for the future growth of trade and investment.

“Given how important it is for Canada to boost exports to be a key driver of growth, this sets the stage for us to take advantage of an opportunity with one of the largest economies in the world, and it’s time for Canada and Canadian firms to step up and take advantage.”