The Bank of Canada says the economy is well-positioned to ride out any economic shocks from China – even though the Asian country has become Canada’s second-biggest trading partner.
Senior deputy governor Carolyn Wilkins said Tuesday that if growth in China’s economy comes in one percentage point lower than projections, then Canadian growth would slip one-tenth of a percentage point.
By comparison, if the same decline happened to the United States, the impact on Canada’s gross domestic product would be six times greater, Wilkins said in a speech to the Vancouver Board of Trade.
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The bank, she added, has been exploring how Canada might be affected by any shocks that could emerge as China’s maturing economy slows to a more sustainable pace of growth.
“Canada is not immune to the risks that China’s transition poses to the global economy,” Wilkins said. “But it’s nonetheless well-positioned to manage them.”
Her speech said Canadian banks have little direct exposure to China and that any negative reverberations would mostly be felt through a slowdown in trade and weaker commodity prices.
She noted, however, that a sudden, significant drop in the value of China’s currency – the renminbi – could disrupt the global financial system, which would have consequences for Canada.
“Canadian financial institutions have the capital and the liquidity in place to handle these kinds of adverse shocks,” Wilkins said.
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The text of her prepared speech said Bank of Canada models have shown Canadian banks can withstand a shock larger than what occurred during the 2008 financial crisis.
Wilkins said the Bank of Canada believes China has the potential to grow at an annual rate of about six per cent over the next 15 years. In January, the bank predicted the Chinese economy would grow by 6.4 per cent in 2016 and 6.2 per cent next year.
She noted that two-way trade between Canada and China has increased more than five-fold over the last 15 years and that about 400 Canadian companies now have footholds there. Canadian exports to China now exceed $20 billion a year, Wilkins added.
“It’s hard to overstate just how quickly economic links between our two countries have developed,” her speech said.
Last month, the federal government said in its budget that it’s committed to expanding its trade relationship with China.
Ottawa’s budget also noted that the International Monetary Fund has warned there are risks that growth in China could slow more quickly than anticipated.
“Rebalancing in China could result in a sharper-than-expected slowdown in growth, prompting further volatility in financial markets and greater declines in global commodity prices,” the budget said.