Sputtering Chinese economy fans fears of global slowdown

Market turmoil sends lurching loonie to lowest level since 2003

Another dramatic plunge in China’s stock market swiftly spread around the world, fanning fears of a global economic slowdown and sending crude oil prices to fresh 12-year lows Thursday.

That’s bad news for oil exporting countries like Canada, which is already struggling to eke out modest economic growth in the face of a dramatic plunge in the price of its biggest export.

The continuing turmoil in China sent the Canadian dollar to its lowest level since 2003 and lopped another 2.2 per cent off Toronto’s stock market, pushing it into bear territory, defined as a 20 per cent decline from a recent peak.

U.S. billionaire investor George Soros called the challenges facing China a potential “crisis” for investors as the world’s second-largest economy attempts to find new sources of economic growth.

In a speech in Sri Lanka, Soros compared with to the U.S.-led financial crisis of 2008, which led to a global recession.

Global markets have now lost $2.5 trillion (U.S.) in the past four days, the worst start to a calendar year since the dot-com meltdown in 2000.

The sharp drop in the price of crude oil, along with other commodities, has cost Canada $50 billion in lost national income since mid-2014, Bank of Canada governor Stephen Poloz said in a speech in Ottawa Thursday.

That works out to $1,500 per person, he said, quantifying its impact for the first time.

But as long as oil prices are low, Canadians will just have to live with a low dollar, Poloz added, noting that is helping offset some of the damage by making Canada’s exports more competitive.

“Movements in exchange rates are helping economies, including ours, make the adjustments that must take place,” he said.

Thursday’s market sell-off began after China’s main stock index fell 7 per cent as its central bank weakened the Chinese currency for the eighth day. The move was seen as a bid to revive China’s sagging economic growth rate. Any slowdown in the world’s second-largest economy, and biggest consumer of commodities, is seen as negative for global growth.

The dramatic fall triggered an automatic trading halt. It was the second time in a week that circuit breakers installed last summer to curb volatility had sprung into action. Later in the day, Chinese authorities said they would suspend the circuit breaker system.

But the market contagion had already spread to Asia, Europe and North America on fears the currency devaluation is another sign China’s economy is faltering.

“It is shaping up to be another (wildly) negative day in global equity markets,” Douglas Porter, chief economist with BMO Financial Group, wrote in a note to clients. “Panic is at play here.”

The price of crude oil slid 2 per cent to $33.26 cents for West Texas Intermediate, the North American benchmark for crude, delivering another blow to Canada’s struggling energy sector.

The Canadian dollar closed at 70.94 cents (U.S.), its lowest level since 2003.

Global stock markets also took a pounding. In Toronto, the Standard & Poor’s/TSX composite index sank 2.19 per cent, or 278 points, to close at 12,448.21at 4 p.m. That’s down 20 per cent from its most recent high in September 2014.

China is Canada’s second-largest trading partner after the U.S.

The impact of crude oil’s price plunge has been hardest on Canada’s energy-dependent provinces, such as Alberta, where unemployment has risen two percentage points as oil plunged from a high of $104 a barrel in June 2014.

A falling dollar has helped make Canada’s non-energy exports more competitive in markets where goods are priced in U.S. currency, Poloz said. However, it has also spread the pain across the country by making imported fruits and vegetables, along with U.S. travel, more expensive, he acknowledged. Canada’s economy could take “three to five years” to adjust to the dramatic decline in oil prices, Poloz said during a press conference following the speech at Ottawa’s city hall.

Ontario’s manufacturing heartland has been slow to see the benefits, partly because so many plants have closed in the last decade, making it tougher to ramp up to meet new demand. Poloz cut the central bank’s trendsetting interest rate twice in 2015, to 0.5 per cent, which drove down the cost of borrowing for consumers and business.