How B.C. can build long-term business bridges with China

A container ship heading to a Chinese harbour

B.C.’s trade with China has increased fivefold over the past decade. But growth of that magnitude is unlikely to continue, especially as the Middle Kingdom looks beyond resources for imports

Colin Hansen has done this before: a transpacific flight leading into two weeks of dawn-to-dusk meetings, fuelled by enough coffee to start a trade deficit with Colombia. It’s early April and he is packing his bags for another whirlwind tour that will touch down in Seoul, Beijing, Shanghai, Xiamen, Shenzhen and Hong Kong. Hansen is only a few months into his new role as president and CEO of AdvantageBC, a nonprofit organization that promotes B.C.’s business sector on the world stage. He has, however, been making the rounds in Asia for nearly 15 years as a former senior minister in the provincial government. Over the years, one trade mission has followed another, with one key goal in mind: to open the doors to trade with China.

Hansen, like many observers, has long seen China as a land of vast, still-untapped opportunity. The country began opening its economy to market reforms in 1979, and since then has experienced staggering progress with real GDP growth averaging nearly 10 per cent per year. At that rate, the Chinese economy doubles its size in real terms every eight years (mature markets such as B.C.’s prime trading partner, the United States, haven’t exceeded five per cent real annual GDP growth in more than a decade). There are other quickly expanding economies in Asia and elsewhere, but none exert the sheer gravitational force of China, with nearly one-fifth of the world’s population. Yet despite a voracious Chinese appetite for B.C. commodities and years of effort by successive governments (NDP Premier Glen Clark led a trade mission to China in 1998), B.C. companies have been tentative to seize Chinese opportunities. Now, as China’s economy slows and turns to a more consumer-oriented focus, the nature of its trade opportunities is shifting.

B.C. trade with China grew substantially over the past 10 years, with exports expanding from $1.2 billion in 2004 to $6.3 billion in 2014. On the face of it, those are encouraging figures, but they represent a micro-fraction of the $1.41 trillion China imports annually. Canada is the 17th-largest exporter to China, with B.C. representing about a third of Canada’s $19.8 billion total. Global competitors such as Australia ($72.5 billion) and Brazil ($41.3 billion) sell far more of the same kinds of commodities (including coal and non-precious metals) to the Chinese.

Progress in China, Hansen says, does not come quickly. It takes years of relationship building to lay the groundwork for actual trade. He recalls how in 2003 the provincial government opened an office in Shanghai called the Canada Wood Project to promote B.C. forestry products. “Initially people were very skeptical and said that you’re not going to sell lumber into China because they don’t use lumber for construction.”

For the first three years afterward, lumber sales to China remained flat, staying below $65 million per year. But in 2011, that total soared to $1.4 billion and has remained at that level since. “I think it’s sort of a classic story about doing business in China,” says Hansen. “You’re not going to go in and fill an order book on your first trip.”

The former B.C. finance minister’s most recent trip sees him on a mission to help Vancouver grow into a hub for international financial services to facilitate trade between Asia and North America. Part of that mission includes promoting the new Vancouver-based renminbi trading hub, which was announced last November (more on that on p.158). The hub means that Canadian businesses wanting to do business with Chinese ones will no longer need to convert their Canadian dollars to U.S. dollars before converting again to Chinese currency—nor will they need to settle trade transactions through a bank in Hong Kong, where it is typically done now. In 2004, the Bank of China (Hong Kong) Limited became the first institution outside of Mainland China to be designated by China’s central bank, the People’s Bank of China, as a clearing bank for settling RMB transactions.

Vancouver—with its dearth of head offices—seems an odd place to grow a financial hub, but Hansen has his sales pitch ready. “Vancouver is the gateway for Canada when it comes to exports—and not to forget Prince Rupert as well, which is growing rapidly,” he says. “But the other big advantage we have is time zone. The end of the business day in Vancouver overlaps with the start of the business day in Asia.” As such, companies and financial institutions can work out details in real time with a phone call or an email.

An expanded financial services sector would help diversify a provincial economy that remains heavily dependent on natural resources. B.C. must expand beyond these traditional industries if it wants to take part in China’s next chapter of growth. The Economist Intelligence Unit projects China’s real GDP growth will slow considerably in the years to come, averaging 6.3 per cent between 2014 and 2020 before slowing to 4.1 per cent for the decade after. Already, China’s enormous manufacturing sector is losing steam, with service industries such as logistics, retail and information technology now employing nearly 40 per cent of China’s workforce. The Chinese government has indicated that its goal is to move away from energy-intensive, high-polluting industries and toward technology industries and services— and that could diminish the country’s appetite for B.C. minerals and lumber.

HSBC Canada’s chief economist David Watt says Canadian companies have traditionally been slow to take advantage of opportunities in China, and the companies that have gone there have been limited to a handful of sectors. “China has obviously been an opportunity, a wonderful opportunity,” he says. “But we tend to be very, very levered towards the commodities, without necessarily creating the back stop in case the commodity story doesn’t play out as we’d anticipated. You can see that across the Canadian economy.”

As China’s population grows wealthier, the new opportunities will be in financial services, healthcare, information technology and agriculture, says Watt. “We don’t have a big private health-care sector in Canada, but if you think about what’s going on in China, their demographics are certainly leaning towards an aging population.” The ultimate goal, he says, should be to utilize Canada’s resource wealth to develop value-added sectors in the economy and become more like Germany. That country’s main exports—medical supplies, aerospace technology and cars—are less vulnerable to the fickle fortunes of the commodities markets.

Canada needs to develop policies that encourage companies to invest in sectors beyond commodities, Watt says. “I’m generally disappointed at how we’re doing that. We tend to talk a lot in that regard, but because the resource sector is such a draw it’s challenging to create some sort of balance.”

PLUS: You’re invited to the BCBusiness “Doing Business in China” breakfast on October 27 at the Rosewood Hotel Georgia in Vancouver, sponsored by HSBC.