Concerns about a hard landing for the Chinese economy grew Wednesday after the latest read on the country’s manufacturing sector for November found it shrank to its lowest level since March 2009.
The assessment served as a dose of bad news for Canadian resource companies that have benefited from what has seemed like insatiable demand from China.
Stock in major Toronto-listed resource companies fell after the report came out, with shares in Teck Resources Ltd. (TSX:TCK.B), Canada’s largest publicly traded base metals company, down $1.38 or about four per cent at $33.02.
The drop in China came amid slowing domestic demand and expectations that global demand will also weaken.
Hongbin Qu, HSBC’s chief economist for China and co-head of Asian economic research, noted the drop implies that industrial production will likely slow to an annual growth rate of 11 to 12 per cent in the coming months.
“That said, as inflation is likely to decelerate at a faster than expected pace, it will leave more room for Beijing to step up selective easing measures, which should gradually filter through to keep China on track for a soft landing,” he said.
HSBC reported that its flash purchasing managers’ index for the Asian country slipped to 48 compared with 51 in October, while its flash manufacturing output index also slipped to 46.7 from 51.4 in October, also a 32-month low.
A reading of less than 50 indicates contraction. China has been one of the few bright spots for the global economy, as Europe has struggled with concerns about government debt and the U.S. recovery has been sluggish.
Paul Ferley, assistant chief economist at the Royal Bank, said Canada’s direct trade with China isn’t huge, but a slowing Chinese economy could affect commodity prices, which would affect Canadian companies directly.
“We’ve been seeing commodity prices move to historically high levels and a big factor has been increased demand from key emerging market economies, with China playing a major role,” he said.
“It may dampen some of the capital expenditure plans that are currently in place as various producers come to the conclusion on the weakening in commodity prices that certain projects are not viable.”
China has been a major destination for Canadian raw materials such as metals, coal, minerals and timber. Canadian coal has fuelled Chinese steel furnaces, while mining companies have provided the other base materials to supply growing factory demand.
Canadian forestry companies have also seen shipments to China rise as the U.S. housing market — a key market for lumber producers — has remained in a near catatonic state.
But Ferley noted that there are other emerging economies that are growing quickly, in addition to China.
“Things like higher gold prices are benefiting from strength in India and some of the strength in things like potash prices are benefiting from continued not-bad growth in Brazil. So it is not solely a China story,” he said.
Chinese companies owns a 20 per cent stake in Teck Resources as well as expanded in the oilsands sector of northern Alberta. A Chinese firm has also partnered with Japanese trading house Marubeni to buy Grande Cache Coal (TSX:GCE) for $1 billion.
They have also helped finance iron ore exploration in northern Quebec and other mining projects in the rest of Canada.