China’s 5G Plan and Canada’s Debt


A war against China’s 5G network, led by Huawei, is emerging in the West. The outcome, and whether Huawei is allowed or denied to implement 5G in western nations, will be transformational to global trade and intelligence.

As usual, Canada, as a middle power, is caught in the crosshairs between two behemoths, and its next move could prove critical.

With the United States leading the charge, the West is turning on China and working to halt Huawei’s rise. Even former Prime Minister of Canada, Stephen Harper, went on the record to urge Canada to resist Huawei and keep them from having access to the country’s 5G network…

Before looking at why this matters so much for investors, let’s review Canada’s financial outlook for 2019. Understanding our structurally weak position will provide context for the next move.

Outside of a booming, world-class marijuana sector, Canada’s economy continues to underperform. Far from robust, its GDP has waffled in the 2% range for much of the past ten years.

Canada GDP Annual Growth Rate

As speculators, we are inherently optimistic, but also on the lookout for potential headwinds. Unless you’re the United States (world reserve currency status, sole superpower), debt is a weakness. Canadian debt levels are concerning and may inhibit selling federal assets to foreign funds and sovereign wealth funds (think airports, roads etc.). High debt loads in the Great White North will also negatively impact domestic demand (think slow down in housing).

Canada’s Achilles Heel

While bright spots exist from cannabis to renewable energy and tech, household debt remains dangerously high in Canada. Debt is Canada’s Achilles heel. It’s what no one wants to admit or discuss because to deleverage is painful and requires lifestyle changes. It’s one of the reasons GDP always reverts to its median average of about 2% over the past ten years. And with Trudeau’s Liberal government running higher than projected deficits, it is becoming the elephant in the room for Canada and its bondholders.

In late December, around Christmas, the federal Finance Department admitted it didn’t expect to balance the budget until 2040. While it went largely unnoticed, it was a shock to the few paying attention. You might recall the Liberals promised to balance the books by the end of their mandate, in 2019. Think about the situation for a second… 2040 is an entire generation away!

Now, like the Americans, we are running deficits every year. Furthermore, while the Canadian government clearly has a debt issue, its citizens have a debt disease.

Canada Households Debt To Disposable Income Hits All-Time High in 2018

Household debt in Canada

chart source: Trading Economics
Households debt in Canada increased to a record 176.01% of gross income in 2018.


The average Canadian now owes about $1.76 for every dollar he or she earns per year, after taxes. While this figure includes mortgages, it is still alarmingly high for a developed country in the West.

For example, household debt in the United Kingdom decreased to 125.10% of gross income in 2017. Household debt to income in Spain is expected to be 95.10% by the end of this quarter.

What about household debt to GDP (sort of a debt to output measurement)? Well, it’s not pretty either…

Canada Households Debt To GDP Crests Above 100%

Canada household debt to GDP
source: Trading Economics
N.B. Households debt to GDP in Canada averaged 59.41% of GDP from 1969 until 2018. Unsurprisingly, it is currently near its all-time high.


Unlike in the U.S., the 2008 Financial Crisis had little impact on Canadian household spending habits. Let’s take a look at our neighbors to the south and their related household debt ratio…

US households debt to GDP
source: Trading Economics
N.B. After reaching an all-time high of 98.60% of GDP in the first quarter of 2008, American households have reduced their debt levels by over 20% – astounding!

Judging by the two charts above, the average household in Canada is dangerously indebted. While the US government spends into oblivion, its people continue to reduce spending (or at least they’re saving more). For perhaps the scariest stat of all: Canada’s household saving rate fell off a cliff in Q3 2018 to a record low of 0.8%.

Canadian savings rate
source: Trading Economics
N.B. The Personal Savings in Canada averaged 7.29 percent from 1981 until 2018. For it to have fallen to under 1% is unimaginable and should come as a warning.

Canadian Concerns

According to a new poll released in January 2019 from insolvency firm MNP Ltd.,

“The number of Canadians who are $200 or less away from financial insolvency at month-end has jumped to 46 per cent, up from 40 per cent in the previous quarter, as interest rates rise…”

So, while unemployment is low, Canada’s economic footing is weak. There are structural deficiencies with the potential to impoverish millions of Canadians.

The cash-strapped Canadian consumer cannot absorb higher costs of borrowing without making dramatic lifestyle changes. Thankfully, the Fed left its primary fund rate unchanged on Wednesday, January 30th – sending US stocks to new short-term highs.

Given the data above, we continue to believe rate hikes are off the table for the foreseeable future. This goes for the Fed and Bank of Canada (which often works in lockstep with its U.S. counterpart).

There is an underlying fragility associated with the Canadian economy. As we’ve seen, instead of reducing our collective balance sheets, they’ve exploded since 2008. While this trend shows no signs of abating, external threats are rising as well…

Canada is ill-suited to wage a trade war in an era of trade wars. It needs a new foreign buyer, ideally China, but relations between the two nations is at its worst point in decades. Canada’s dependence on the United States is about to shine through via geopolitical pressure to act against China’s 5G plans and Huawei.

Chinese Investment into Canada Falls 47% YoY

Shocking data from the Canada-China Investment Tracker, maintained by the University of Alberta’s China Institute, was reported in a Financial Times article from January 28th. According to the report looking at 2018,

“Total investment fell to $4.43 billion from $8.45 billion in 2017.”

Gordon Houlden, a former Canadian diplomat and head of the institute stated,

“What struck us was the sharpness of the decline, which was quite significant albeit somewhat in line with global figures.”

And that,

“It suggests the heady days of Chinese investment are certainly over for now.”

Canada to Align with ‘Five Eyes’ Counterparts

For Canada, a country dependent on an increasingly independent and, at times, erratic U.S., a collapse in trade with China is alarming. While Canada arguably needs diversification and Asian trade now, more than ever, it has always known which side of its bread is buttered…

So begins the story of the West (primarily the ‘5 eyes’ – representing Canada, America, England, Australia and New Zealand) finally turning on China as combatants square off in a battle to control global 5G networks.

What is 5G? We wrote about it almost exactly one year ago, in a Weekly Intelligence Report titled Trump’s Bold New Plan Involves 5G, writing:

“Because of this, 5G will be the lifeblood of the new economy and in many ways redefine the experience of the internet and all it allows us to do. 5G will be the engine of economic innovation moving forward and drive things like artificial intelligence and machine learning into smartphones for everyone. 5G, in some environments, is estimated to provide 100 times faster downloads than the network capabilities we have today.”

Huawei is the world’s second-largest smartphone maker, surpassing Apple in 2017. The company is working on a foldable phone which will debut later this year and be the company’s first 5G-enabled handset.

According to a November CNBC article,

“Huawei aims to overtake Samsung as No. 1 smartphone player by 2020.”

While the US is confident China is building spyware into its phones and networks across the world, it also wants to be sure its global dominance endures.

Like the internet in the 90s, 5G will be the fastest, most secure network in the world. Whoever controls it will have an advantage in almost every aspect of global commerce.

Watch the video How 5G will change your smartphone, and your life in 2019, to learn more.

Canada Playing the Crucial Pawn in US-China Faceoff

Canada’s Sino relations took a turn for the worse when Huawei CFO, Ms. Meng was arrested on December 1st in Vancouver at the behest of the Americans. Ms. Meng is the daughter of Ren Zhengfei, the founder of Huawei and one of the richest men in China.

On January 30th, The Globe and Mail confirmed,

“Canada has received a formal request from the United States for the extradition of Huawei executive Meng Wanzhou, officially starting the clock on a complex process that could ultimately see her sent stateside to face multiple charges of financial fraud.”

And that,

“Federal Justice Minister David Lametti has until March 1 to determine whether to issue an authority to proceed.”

It will likely take much longer than this, but the U.S. is pushing hard.

To be fair, Canada is simply upholding long-established international law via its extradition agreement with the United States. However, the timing, players involved, and motives surrounded by an escalating trade war between the U.S. and China may not be purely coincidental.

Giving Canada more cause for concern is that China has arrested a few Canadians either living in or passing through China. After a convicted Canadian drug dealer was sentenced to death in China, Trudeau made a tougher than usual statement…

Trudeau Gets Tough(er)

In response to the ruling, Trudeau said it should be of extreme concern to Canada’s friends and allies. And that China had chosen to “arbitrarily apply” the harsh death sentence penalty.

Hua Chunying, Chinese Foreign Ministry spokesperson, was quick to respond, stating:

The Canadian prime minister should “respect the rule of law, respect China’s judicial sovereignty, correct mistakes and stop making irresponsible remarks.”

That was mid-January.

On Wednesday afternoon, The Globe and Mail ran a story with the headline:

U.S. intelligence warns China is single largest espionage threat as Canada mulls Huawei ban

The report stated,

“The United States, Australia and New Zealand, all key Canadian allies, have already announced restrictions on the use of Huawei equipment…”

Furthermore,

“At a Capitol Hill meeting of the U.S. Senate intelligence committee Tuesday, the chiefs of the U.S.’s spy agencies warned that China represents the single largest espionage threat to the country.”

What’s more,

“Dan Coats, the director of National Intelligence, said industries from automaking to software creation to military research and development have all been targeted by Chinese efforts to pilfer trade secrets.”

West to Abandon China’s 5G Network Dreams

If the West continues on its path to isolate China, it could have a phenomenal impact on global trade and manufacturing sectors.

On January 29th, the US charged Huawei with fraud for violating Iran sanctions and stealing trade secrets. Just days ahead of a critical trade meeting between the U.S. and China, the Americans are not letting up.

Prior to that announcement by the U.S. Justice Department, China urged state firms to avoid travelling to the Five Eyes countries, according to Bloomberg.

Speaking this week, Prime Minister Justin Trudeau says a decision on whether to ban Huawei technology from the 5G network should not be political. Watch the video here. It’s hard to imagine the decision being anything but politically motivated. Canada will have to kowtow to the U.S. government, purely based on political alliances and economics…

Canada’s Top Trading Partners in 2017

  1. United States: US$319.6 billion (76% of total Canadian exports)
  2. China: $18.2 billion (4.3%)
  3. United Kingdom: $13.6 billion (3.2%)

Clearly, exports are heavily lopsided for the U.S. As such, Canada knows it can’t mess around and will have to stay tight with its closest ally and biggest customer. Huawei’s 5G plan be damned.

The new economic focus of the world is 5G. Both China and America want to control it. The country which controls the 5G network controls the internet.

We are in the midst of global economic war. It is likely less a question of if, but when Canada joins its Western allies in resisting Huawei, essentially turning its back on China.

Canada cannot afford to upset the United States anymore. Trudeau, or the next Prime Minister, will have to hope they can patch things up with China down the road.

The global effort to launch and control 5G networks will dominate news cycles over the coming year or two. For investors, becoming well versed in everything 5G should be top of mind in 2019.

All the best with your investments,

PINNACLEDIGEST.COM

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