There has been a lot going on in Canada lately. And as ambiguous as that sounds, it is true. More specifically, there is a lot going on with the Canadian economy, and today on the CME blog, we are proud to present a Dr. Sherry Cooper doublepack. Topic of discussion: Jobs and China. What does China have to do with Canada? Better read to find out! Here goes nothing. 

Canadian Job Surge in January

January’s payroll gain was a huge 48,300 Statistics Canada said on Friday in Ottawa, well above economists’ forecast of a loss of 10,000 jobs. This follows a gain of a whopping 46,100 in December. The unemployment rate fell by 0.1 percentage points to 6.8%.

Employment growth has been strong since August. Canada posted the best quarterly hiring gain since 2010 in the final quarter of last year. Full-time employment held steady following a substantial increase in December. This may signal the country’s economy is finally turning the corner after two years of pain induced by the collapse in oil prices.
Most of the job gains were for men aged 25 to 54, with the increase of about 30,000, the largest in more than two years.

Gains in the average hourly wages of permanent employees slowed to 1% in January from a year earlier, the smallest gain since 2003, from the 1.5% pace in the last two months.

Hours worked also fell 0.8% from a year earlier.

Thus, the report continued to show signs of an uneven job market, something that has led Bank of Canada Governor Stephen Poloz to stress there’s much more labour slack than in the US, meaning there could be further divergence in monetary policy as the Fed continues to gradually hike rates and the Bank of Canada remains on the sidelines this year.

Demand for financial and business services led the way in January. Employment in finance, insurance, real estate, rental and leasing increased by 21,000, bringing gains from 12 months earlier to 59,000 (+5.3%), with most of this increase concentrated in the last six months.
There were 16,000 more people working in business, building and other support services last month. On a year-over-year basis, employment in this industry was little changed.

Compared with December, employment rose in Ontario, British Columbia, Nova Scotia and Newfoundland and Labrador. In contrast, there were fewer people working in New Brunswick. Employment was little changed in the remaining provinces.

Canadian labour markets have improved relative to the US, as labour force participation rates remain above unusually weak levels in the US. Adjusted to the measurement concepts in the US, the unemployment rate in Canada was 5.7% in January, compared with 4.8% in the US. Over the past year, the jobless rate fell 0.5 percentage points in Canada, while it was little changed in the US as it nears full-employment.

In January, the labour force participation rate was 65.8% in Canada (adjusted to US concepts) and 62.9% in the US. On a year-over-year basis, the participation rate was unchanged in Canada, while it increased slightly in the US as some discouraged workers resumed their job search.

In a separate report, Canada posted a second consecutive monthly trade surplus. Exports increased 0.8% on the strength of higher energy product prices. Imports increased 1.0%, mainly reflecting stronger imports of aircraft and industrial machinery.

Canada’s merchandise trade surplus with the United States narrowed from $4.7 billion in November to $4.4 billion in December. This will no doubt be a topic of discussion on Monday in Washington when PM Trudeau meets with President Trump. Those discussions will likely be cordial, although the renegotiation of NAFTA and Trump’s threat of a border tax has jeopardized the stability of one of the largest two-way trading partnerships in the world.

 And without further ado, here is the second article in our Dr. Sherry Cooper doublepack << that could be an awesome hashtag #DrSherryDoublepack – consider it hashtagged. 

China’s Crackdown On Capital Outflows Sending Shudders Through Global Property Markets

China’s Global Homebuyers Could Be Suddenly Cash Poor

Property prices around the world have benefited from the demand of foreign buyers, a.k.a. China’s capital outflows. China has issued unexpected rules on exchanging yuan for international currency. This could impact real estate around the world. Some argue it already has.

China’s Clamp Down on Outflows

As capital flight intensified, China’s reserves have plunged, causing the country to sell US treasury bonds. In response, China has introduced new rules, which now require disclosure of the intended use of the yuan being converted. In addition, they must pledge the money won’t be used for the purchase of property, securities, or insurance products. Borrowing or lending on behalf of others is now prohibited, and requires a legal declaration saying you have not done so. Anyone caught breaking the rules will be denied the conversion and lose exchange rights for two years. They can also be subject to an anti-money laundering investigation.
China’s currency is not freely convertible on the open market. In order for yuan to be used internationally, the People’s Bank of China purchases foreign currency and provides liquidity for yuan holders. The government restrictions already exist–each Chinese citizen can trade up to US$50,000 per year, and only that much can leave the country. This rule has not forestalled huge outflows.

Despite the rule, one measure of capital outflow from the State Administration of Foreign Exchange (SAFE) shows approximately US$1 trillion dollars worth of yuan were removed from the foreign exchange reserves from the 2014 peak to November 2016. To put that in perspective, this outflow is larger than the entire gross national product of Canada in 2016.

Much of this money found its way into global real estate markets causing prices to boom. Property prices surged in some parts of Canada, the US, the UK, New Zealand and Australia, all countries that had relatively low barriers to importing large volumes of capital and liquid currencies.

Some analysts believe that the party might be over. However, China has a massive underground banking market that operates in the shadows. In August 2016, the Chinese government shut down one operation in Shenzhen, but no one knows just how many more such shadow banks there are.

Also, some Chinese people purchased homes via a process called smurfing–where large amounts of money are broken down into small undetectable amounts. Homes are an easy way to reassemble the money into a single house-shaped bank account. However, you need to sell the home to retrieve the money.

Many people that do this are just looking for a way to hedge against any devaluation their hard-earned money might experience as a result of a major currency change. It does present a problem for domestic investors though. If a large number of people smurfing require their money soon, they’ll have to sell. This will provide downward pressure on house prices.

There is anecdotal evidence that tighter restrictions on capital outflows from China is having an impact. According to Bloomberg News, “China’s escalating crackdown on capital outflows is sending shudders through property markets around the world. … In Silicon Valley, Keller Williams Realty says inquiries from China have slumped since the start of the year. And in Sydney, developers are facing “big problems” as Chinese buyers pull back, according to consultancy firm Basis Point.”

“Everything changed’’ as it became more difficult to send money offshore,” said Coco Tan, a broker associate at Keller Williams in Cupertino, California. Bloomberg further reports that “In London, Chinese citizens who clamored to purchase flats at the city’s tallest apartment tower three months ago are now struggling to transfer their down payments.”

We have seen a slowdown in high-end purchases in Vancouver since the August imposition of a 15% land transfer tax on nonresident foreigners. While home sales were slowing even before the tax, it might just be that some of that slowdown was the result of China’s efforts to stem the outflow of capital.

“While no one expects Chinese demand to disappear anytime soon, the clampdown is deterring first-time buyers who lack offshore assets and the expertise to skirt tighter capital controls.”

 

Dr. Sherry Cooper is the Dominion Lending Centres Chief Economist, she writes lots of great stuff, we like her a lot, and like to feature her on our blog when we need a smart take on the Canadian economy, housing market, or mortgage industry. Have a fabulous day! 

Pin It on Pinterest