Annual Chinese Investment in Canada Forum

Summary Report

By Ron MacIntosh, Senior Fellow, China Institute, University of Alberta

On May 4, 2012 in Calgary, the China Institute of the University of Alberta convened a forum of approximately 80 representatives of the government, private sector, and academic and research communities to consider the challenges and opportunities in seeking, expanding and retaining Chinese direct investment in Canada. The Forum focussed on the public policy dimensions of Chinese investment in Canada

The Forum considered recent global trends in Chinese foreign direct investment (FDI) and Canada’s still modest place therein. It was stressed that, while Chinese FDI had grown rapidly in the recent years reaching a stock value of approximately $338 B by 2012 (Ministry of Commerce figures), China’s share of total global investment (just over $20 TR) was still exceptionally small, only 6 percent even if Hong Kong/Macao included - 1.5 percent if China alone. Chinese businesses, moreover, are relatively “new to the game”.

The recent and substantial investments in Alberta’s oil sands were noted as well as resource investments elsewhere in Canada, particularly in the Yukon. While energy and resources remains a key driver of flows to Canada, the Forum was reminded that this investment had begun to diversify, however gradually, to other sectors including manufacturing, agro-industry, chemicals and services. The Forum participants expressed hope that the recent conclusion of negotiations on Foreign Investment Promotion and Protection Agreement (FIPA) negotiations will serve to jumpstart investment in both directions as part of a larger sophistication and maturation in the bilateral economic relationship.

Within the resource sector, the Forum heard that Chinese firms are moving to greater equity stakes in their projects. In mining and metals, most projects are typically in the $20-50 million range while, in energy, the scale of investments has grown and extended to the assumption of controlling interests (Mackay River, Daylight Energy, OPTI etc). This indicates higher comfort levels among Chinese investors in Canada.

In the energy and resource sectors, moreover, Forum participants noted that funding costs faced by Chinese firms are lower than that of North American counterparts – lower still in some developing countries. Energy import dependency and concerns over energy security are growing dramatically in China and overseas investment is seen as a hedge against supply instability. Nonetheless, nonetheless, competition for China’s investment exists and there was a consensus at the Forum that proactive and holistic effort by both Canada and China would be necessary to realize the potential of investment in growing our ties. A passive approach would not suffice. In addition, it was urged by several participants that we develop an investment relationship that extends beyond individual transactions to ones engaging downstream and spin-off benefits as well as in education, research and third country cooperation.

It was recognized that Canadians need a more precise sense of how best to mobilize China’s ample investment resources, in part by understanding Chinese objectives at both the national and firm level and, as noted earlier, how Chinese investors are likely to calculate the relative value or risk of a Canadian investment.

A number of Forum participants noted that Canadians themselves would benefit from acquiring a sense of our own strategic objectives in strengthening investment ties with China, whether as part of an effort to diversify our economic ties abroad, to develop our position as an energy superpower, to meet gaps in needed capital requirements, to share risks on specific projects – bilaterally or in third countries, to position our industries in strategic sectors, to help drive much-needed infrastructure development or in other respects such as to showcase our excellence in technology, education, and research.

The soon-to-be-completed “complementarities study” for the Canadian and Chinese governments, while it may or may not lead to negotiations on a broader economic or trade agreement, could nonetheless serve to illustrate sectors and instruments of greatest promise and mutual advantage that can inform private investment decisions.

The weak degree of public support in Canada, particularly in Ontario, remains an issue and perhaps a constraint in dealing with public policy issues associated with Chinese investment in Canada. The China Institute’s own poll of Albertans showed this to be much less a concern in Alberta but nationally, an Asia Pacific Foundation of Canada survey was noted in this regard which showed that, while support for expanded investment from the Asia Pacific region had risen past 60 percent, in the case of Chinese SOEs, that level was only 16 percent.

Among a number of more specific areas identified for future discussion, recommendation and action were:

- A more vigorous and persuasive effort to clarify, convey and project Canada’s “value proposition” for Chinese investors aligned to China’s perceived needs - whether our world competitive corporate tax rates, our resources, RandD capacity, labour force quality or other specific advantages of our business environment;

- An effort to strengthen public dialogue and public education on Chinese FDI in Canada; above all on the role of Chinese State-Owned Enterprises (SOEs), inter alia building Canadians’ confidence that our legal frameworks are sufficient to address labour, safety or environmental concerns;

- Accelerated efforts to address remaining real or perceived issues in our regulatory frameworks affecting FDI, including implementation of the new review thresholds, early clarification of “net benefit” policy and practice (including as it will apply to SOEs), progress in streamlining environmental assessments and, of special concern to Chinese investors, a look at temporary resident visa rules and/or their enforcement.

- Particularly in the wake of the FIPA, new attention to investment rules faced by Canadian business in China including questions of transparency, investor dispute settlement, and other practices affecting business operations in the Chinese setting. This is essential in building needed mutual confidence and thus momentum.

- Recognition that efforts both to promote investment and to address public policy or infrastructure questions require integrated approaches and strategies ideally engaging all levels of governments, private sector representatives including SMEs, centres of learning or research, as well as First Nations, and civil society groups

- Taking advantage of recently enhanced senior ministerial engagement, constructing a stronger role for investment in the context of overall bilateral ties between Canada and China, building on our strengths, using investment as a vehicle to diversify and mature the economic relationship

Underlying many of the foregoing themes is an overarching need for enhanced communications – between Canada and China at the national level, between Canadian and Chinese enterprises, and between respective governments and their stakeholders and general publics. This is essential in overcoming, for example, needless misperceptions of each other’s rules, whether it is an unwarranted degree of concern among potential Chinese investors of investment proposal rejection – there has not been a single such case - or unsupported fears in the media or among the Canadian public over Chinese SOE company practices. Such communication, strategically conceived and delivered, is critical in building an enabling and sustaining environment for two-way business expansion.

The Institute was most privileged to have as a keynote speaker His Excellency Zhang Junsai, Ambassador of the People’s Republic of China, who urged a perspective on Chinese investment extending beyond the resource sector and building on the strength of our overall relationship. On the subject of energy, the Ambassador also reminded that, in reference to current controversies over pipeline infrastructure, Canada must compete with a variety of sources in supplying oil and gas to the Chinese market. While understanding our affinity and close integration with the US, he encouraged Canada to continue its efforts to diversify its international commerce.

The Forum also welcomed the support of the Government of Alberta, in particular the presence and active participation of Minister Manmeet Bhullar of Service Alberta, who reaffirmed the commitment of the province to a lively and engaged partnership with China reinforced by open-ness to a wide range of business and people-to-people opportunities.

Finally, the Institute wishes to express its appreciation for the financial support of Capital Power Corporation in helping to sponsor the Forum.