April 5, 2016 / 7:52 PM / 3 years ago

China transition welcome but poses risks: Bank of Canada

VANCOUVER (Reuters) - China’s transition to a more sustainable pace of growth is welcome, but it will take time and could be marked by periods of economic and financial volatility, a top Bank of Canada official said on Tuesday.

Bank of Canada Senior Deputy Governor Carolyn Wilkins takes part in an event in Ottawa February 10, 2015. REUTERS/Blair Gable

A shock emanating from China would likely have a relatively small impact on Canada’s economy, said Senior Deputy Governor Carolyn Wilkins. While Canada would mainly be affected through lower commodity prices and trade, the country’s banks have little direct exposure to China, the world’s second-largest economy.

“The slowing of China’s growth to a more sustainable pace is not only inevitable, it’s also desirable,” Wilkins said in remarks detailing China’s challenge of shifting from an export-driven economy to one supported by domestic consumption.

“The economic strategy that the Chinese have pursued over the last 15 years cannot continue indefinitely.”

Overall, Canada is well positioned to manage the risks China’s transition poses, she said.

Wilkins’ remarks were the last scheduled by a central bank official ahead of next week’s interest rate decision. The bank is expected to keep rates where they are and update its economic forecasts to include government spending measures. BOCWATCH

A simulation done by Bank of Canada researchers found that if economic growth in China were one percentage point lower than the bank expected, that would result in Canadian growth being 0.1 percentage point lower than otherwise, Wilkins said.

If a similar shock were to happen in the United States, Canada’s largest trading partner, the effect on the Canadian economy would be six times greater.

Statistics Canada data released on Tuesday showed Canada’s bilateral trade with China totaled just C$5.4 billion ($4.1 billion) in January, compared with C$63.6 billion with the United States in the same month.

Bank research shows China has the potential to grow at an average annual rate of around 6 percent over the next 15 years, Wilkins said. Demand for commodities should remain high, a positive for Canada, even if China’s growth is slower and less reliant on natural resources.

She said uncertainty about China’s future has had a surprisingly large effect on investor confidence recently and that a significant and sudden depreciation of the yuan could be disruptive to the global financial system.

China’s stock market slumped last summer and sold off again in January this year, roiling financial markets. China’s economic growth in 2015 cooled to a 25-year low, although Beijing has promised there will be no hard landing.

($1 = $1.32 Canadian)

Writing by Leah Schnurr; Editing by David Ljunggren and Dan Grebler

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