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Forecasting and Analysis
Canadian business leaders have long been accused of missing the boat on China. While the Chinese have had phenomenal success in boosting their exports to Canada and the world, we have been largely unsuccessful at tapping into the huge growth and potential that is China’s domestic economy. So why are the Chinese not buying maple syrup? The answer is simple; Canadian maple syrup is really pricey and it’s probably not going to get any cheaper.
While the data are hard to get at, current estimates suggest that China’s middle class ranges from 100 million to about 250 million, all depending on how one defines middle class. But no matter what the current estimates reveal, the growth potential is phenomenal. The Chinese economy has posted average growth of over 10 per cent for the past decade and this trend of strong growth is expected to continue for decades more. The future path is one that will continue to bring wealth to the masses; helping to bring millions more into the middle class, that is, households that have enough income for discretionary spending. And spend they have. According to a recent news release from Ibisworld nominal retail sales in China have grown by about 15 per cent a year this decade up to 2007—including spending on conspicuous consumption like pet food, consumer electronics, automobiles, fast food, bottled water and confectionary. Yes, it seems that the Chinese do have a sweet tooth.
Through the current recession, while our most prized customer, the U.S. consumer, has stopped shopping, the Chinese economy continues to post strong growth. Yes, growth did slow through the current cycle, but from a gallop to a steady trot is perhaps the best way to describe it. The Chinese continue to thirst for our industrial products and raw materials, yet Canadian firms have had a difficult time penetrating the market with consumer goods or other manufactured products. Data from Industry Canada reveals that from 2001 to 2007, growth in exports of final goods was half that of raw materials. True, one must account for price effects, but exports of consumer goods were well shy of the 15 per cent growth in Chinese retail sales. This suggests that we’ve been losing market share in a retail market that is booming. Moreover, from 2001 to 2008, cumulative exports of maple sugar and syrup have tallied just $306,000—less than 40,000 litres. Likely there are few Chinese that have had a chance to taste it.
The reason for our lack of success can in part be chalked up to price. Up until June 2005, the Yuan was locked with the greenback at a value of 8.28 Yuan per dollar. Since then, the Yuan has been allowed to appreciated, very steadily, to its current value of 6.83 Yuan per dollar. Over this 4-year period, the Yuan has thus appreciated by over 17 per cent. However, the Canadian dollar has appreciated by about the same amount versus the U.S. dollar. Consequently, while U.S. goods have cheapened in the eyes of the Chinese, the price of Canadian goods has remained elevated.
While it’s true that the Yuan is no longer pegged to the U.S. dollar, the currency can hardly be called free-floating. China’s commercial banks are all state-owned, and the “market” auction to determine the value of Yuan is controlled, such that the currency is only allowed to move within a very narrow band. There is evidence that suggests that the Yuan is undervalued, perhaps by as much as 20 or 30 per cent vis-à-vis the greenback. But for now, the path of appreciation is likely to continue as it has—slow, steady, and controlled.
With the Global economy now emerging from recession, volatility around the value of the U.S. dollar is diminishing. But even as the U.S. recovery is more firmly established, the structural issues that have undermined the value of the greenback in the past are returning. Indeed, fiscal and current account imbalances will be even more problematic for the United States in the coming years than they have been in the past decade. If the Yuan is not allowed to appreciate more quickly, the greenback correction will continue to take place with the rest of the world’s free-floating currencies—continuing to place upward pressure on the Canadian dollar.
So from the Chinese consumer’s perspective, while U.S. produced goods have come down in price, maple syrup and other Canadian goods remain expensive. And, in the near-term at least, the loonie’s underlying strength versus the greenback will continue to make it difficult for Canadian business to compete with U.S. rivals for the Chinese market. Still, over the long term, the potential for Canadian exports is phenomenal and, I suspect, once the Chinese taste our syrup, they will not settle for anything less.