How China’s Reopening Could Affect Canada’s Economy

By Steve Scherer and Fergal Smith

OTTAWA/TORONTO (Reuters) – China’s swift reopening should boost demand for commodities that Canada produces in abundance and potentially help Canada’s economy avoid a recession unless it also pushes up inflation and spurs further rate hikes.

The Bank of Canada last month raised interest rates to 4.5%, the highest in 15 years, and said the economy will falter in the first half of the year and could slide into recession. This prompted the central bank to halt its most aggressive tightening cycle for the time being, becoming the first major central bank to do so.

But analysts say a recovering Chinese economy is likely to boost demand for Canada’s key exports, including oil, natural gas, grains, grains and other commodities, making a long-awaited soft landing for the economy more likely than previously thought.

China, the world’s second-biggest economy, has lifted many of the weakest restrictions after abruptly abandoning its strict “zero-COVID” policy in December.

“We’re really seeing China bouncing back accelerating from here with anticipated growth, liquidity and tax spending, with the Canadian dollar and Canadian equities being the primary beneficiaries,” said Joseph Abramson, co-chief investment officer at Northland Wealth Management.

Traders have been bidding on Canadian stocks and the Canadian dollar, dubbed the “commodity currency,” since news of China’s reopening broke in December. The benchmark stock market, which is roughly 30% weighted in energy and mining stocks, is up almost 8%, while the loonie is up 1.8% against the US dollar.

Doug Porter, chief economist at BMO Capital Markets, said China’s reopening is more of a “clear plus” for Canada than for other countries with fewer commodity exports.

Canada has the world’s third-largest oil reserves, which have risen by as much as 17.9% since China began easing its restrictions in December, before giving back much of those gains.

But China’s reopening-driven oil price surge could stoke inflationary pressures, Bank of Canada Governor Tiff Macklem highlighted in an interview with Reuters last week as concerns that interest rates should remain on hold.

“The biggest short-term risk that could quickly throw things off would be if China’s rapid reopening of the economy leads to a spike in global commodity prices and oil prices,” Macklem said.

In the meantime, the US Federal Reserve, the European Central Bank and the Bank of England have also set the course for a pause.

Most analysts are forecasting a more services-driven recovery in China and do not expect this to lead to a dramatic oil shock.

“If it’s primarily services that are driving the recovery from the easing of restrictions, you might not get this explosive pressure on the cost of oil deployments around the world,” said Derek Holt, head of capital markets economics at Scotiabank.

Karl Schamotta, chief market strategist at Corpay, said China’s reopening will help set a floor below global price levels and potentially offset demand destruction if the economy slows.

“But we don’t think western central banks will be forced to tighten more aggressively in response to a new and unexpected inflation shock,” he added.

(Reporting by Steve Scherer and Fergal Smith; Editing by Bill Berkrot)

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