Despite new tax, China’s interest in Canada remains strong

 August 17, 2016

Despite a new 15% tax on foreign property buyers in Vancouver, Canada will continue to attract Chinese investment, especially in agribusiness and tourism.

On August 2nd, the provincial government of British Columbia introduced a 15% property transfer tax on foreign buyers in an effort to quell the red-hot housing market. The levy only applies to Metro Vancouver, which sees 75% of the province’s foreign investment. The majority of said investment comes from China, with foreign money overheating the sector and causing instability. Opponents of the new tax say it contravenes NAFTA agreements, as well as deals with China and 27 other nations. The BC government in turn maintains that it is within its rights to correct an overvalued sector that threatens local sustainability.

Vancouver’s home prices have increased by 172% in fifteen years, while incomes have only increased by 10%. Indeed, prices have increased by 38% in the past twelve months alone, with average house prices rising to CAD $946,945. Local realtors, are unsurprisingly, hostile to the new tax, claiming that at least 427 deals worth around $404 million are likely to collapse as a result of the new levy.

The dilemma facing Canada is how to prevent the housing bubble from bursting, while continuing to encourage foreign investment. The housing sector is presently one of the main drivers (for better or for worse) of the Canadian economy. At 165%, Canada has the highest debt-to-income ratio in the G7 (80% of which are mortgages). The U.S at the height of the 2008 housing crisis only had 147%.

China is aware of this risk, and while it acknowledges the role Chinese investment is playing, it is also beginning to warn investors of the risk in the Canadian housing market. Coming just a few days after the implementation of the 15% tax, warnings in the Chinese media are no coincidence.

Local and national reservations regarding Chinese influence and investment have spurred the implementation of this new tax, yet Sino-Canadian relations remain strong and will be unaffected by these developments. Indeed, 19% of Vancouver’s population is of Chinese descent, many of whom expressed their support for the new law. Consequently, claims that this measure will torpedo Chinese investment are overblown, as investors will likely seek out other, cheaper housing markets across Canada. Moreover, Chinese demand for all things Canadian remains strong, with new opportunities in agribusiness and tourism.

Canadian product profiles continue to rise in China

Food safety and pollution scandals, combined with China’s growing middle and upper classes, has led Chinese consumers to value foreign foodstuffs. Canada’s ecological record and transparency benefit it when doing business in China. The fact that many Chinese associate blue skies, verdant forests, and clean water with Canada, gives Ottawa considerable soft power with which to promote its products.

Alongside Canadian staples like maple syrup and whiskey, China is developing a taste for Canadian ice wine, beef, and seafood. Canada controls 90% of the global ice wine market, and China accounts for 48% of global consumption. Demand from China has established Canadian ice wine as a sought after luxury, propelling Canadian wine exports from virtually zero to eight figure levels in a few short years. The wine is so popular that producers regularly run out of stock, and are having to contend with Chinese counterfeits as demand continues to rise.

Similarly, Chinese consumers are turning to Canadian fisheries, and lobster in particular; giving a boost to economically depressed Atlantic provinces. Peter Hall, chief economist at Export Development Canadanotes that “the Chinese middle class is growing by the Canadian population every year. There is an exponential increase in demand for lobster in China.”

For instance, the province of Nova Scotia saw a 16% increase in the value of fish and farm products in Q1 2016, largely due to Chinese demand. Overall, sector growth is slated for 9% for 2016 and 5% in 2017. Hall goes on to note Nova Scotia’s rapid industry growth: “raw fishing products exported to China have gone from almost nothing ten years ago to a CAD $100 million business. When you add processing that’s another CAD $100 million.”

That said, not everything is smooth sailing for Canadian exports to China, as Beijing recently announced that it would be increasing inspection standards for canola. As the world’s largest canola producer, $1.5 billion worth of Canadian exports to China are at risk. Recent talks to resolve the issue have failed to produce any results, yet are slated to continue as Prime Minister Trudeau is expected to visit before the September G20 meeting. Trudeau has pledged to increase trade with China, a move aimed to repair thefraught relations seen during the previous China-skeptical Harper administration.

Tourism is Canada’s brightest spot

Despite cool relations with the previous Canadian government, Beijing has boosted the Canadian tourism industry, a trend which has picked up steam in the last couple years. Canadian hospitality, combined with its natural beauty are key draws for Chinese tourists. Canada’s multicultural makeup also facilitates greater tourism from China, as Chinese Canadians constituted 4.53% of the population (2011 Census) – compared to 1.2% for the U.S. This simplifies language and cultural issues, builds on existing connections, decreases prejudice, and facilitates a greater understanding of the spending habits of Chinese tourists.

Canada even has – despite being farther away – a higher proportion of Chinese residents than Australia (4%) – a testament to Canadian openness and cosmopolitanism. This number will be markedly higher for the 2016 census, and these ethno-cultural links, combined with a low Canadian dollar, provide many opportunities to strengthen tourism links.

China granted Canada approved destination status in 2010, and China is on track to overtake France as Canada’s third largest tourist source country, (after the U.S and UK). Canada already has ten visa offices in China, and on August 10th Canada expressed its interest to increase this number, with new offices in Nanjing, Chengdu, Wuhan, Jinan, and Shenyang.

Canada’s immigration minister John McCallum has also expressed Ottawa’s wish to increase immigration from China; citing Canada’s interest in skilled workers, as well as more international students.

Since it gained approved destination status, Canada has seen a sharp increase in the number of multiple entry visas issued: from 27,709 in 2010 to 390,290 in 2015. 2015 also saw a record 594,897 temporary resident visa applications from China, an indication of Chinese interest in Canada, as well as a 95% increase in Chinese international students in Canada between 2010 and 2015.

With regards to general tourism, the numbers are also pointing to encouraging trends, something especially important in an otherwise sluggish economy. The latest tourism numbers (Jan – May) show 169,774 visitors from China, 26,261 from Taiwan, and 47,333 from Hong Kong. While the year-on-year rate for Hong Kong is essentially flat at -0.5%, Chinese and Taiwanese tourists numbers have increased 16.2% and 27.9% respectively.

Overall, 2014 saw 661,759 tourists from the three sources listed above, while 2015 saw a substantial increase to 716,279. Growing tourist numbers from China have helped propel the Canadian tourism sector to 1.94% of GDP, surpassing more traditional industries such as mining, agriculture, forestry, telecom, and motor vehicle / parts manufacturing.

Canada has the demographic, economic, cultural, and environmental assets to become a leading destination for Chinese investment and tourism. The relationship has come full circle as China is now enlisting Canadian help in its own efforts to welcome the world for the 2022 Winter Games. Beijing has called on Canadian expertise to provide it with rinks and equipment, as well as training for China’s nascent hockey scene. China’s men’s hockey team is currently ranked 37th, and Beijing is seeking help from the homeland of hockey to improve its chances. Indeed, several Chinese youngsters are on their way to play in Canadian junior leagues: Canada’s first tourism campaign in China in 2011 was called “Say hello to Canada” – a greeting that garnered an enthusiastic reply.