Annual Chinese Investment in Canada Forum

Summary Report

By Ron MacIntosh, Senior Fellow, China Institute

On May 3, 2013 some 100 representatives of the public, private, academic and research sectors from both Canada and the People’s Republic of China convened in Calgary to address ongoing issues surrounding investment ties between Canada and China.

It was the Forum’s privilege to be welcomed by the Honourable Teresa Woo-Paw, Associate Minister, International and Intergovernmental Affairs, Government of Alberta, and also by His Worship, Mayor Naheed Nenshi of Calgary. The Forum benefited from a thoughtful, informative keynote speech on the emerging shape and underlying dynamics of China’s investment by Mr. Daniel Rosen, Senior Partner, Rhodium Group and Visiting Fellow, Peterson Institute of International Economics in Washington DC.

The Forum occurred at a time of Chinese outward direct investment being much in focus. Against a backdrop of China’s increasingly powerful role in global energy and commodity markets in setting prices, providing finance, and determining directions of trade, the medium to longer term trends evolving in Chinese investment abroad are important for Canada and Alberta. Indeed, Chinese outward FDI, while still representing less than 7 percent of the global total, by 2011 had reached a level of US$424 billion according to PRC statistics with flows that are now rising by over US$60 billion a year and may reach a minimum of aggregate stock of US$2 trillion in the next 7-8 years – with one estimate as high as US$5 trillion.

To review, at the 2012 Forum, participants identified the following action areas: the needs (a) to clarify, convey, and project Canada’s value proposition as an investment destination; (b) to strengthen public dialogue on Chinese FDI in Canada; (c) to accelerate efforts to address remaining issues in our regulatory frameworks, including review thresholds and net benefit ; (d) to give new attention to investment rules faced by Canadian business in China; (e) to employ more integrated and inclusive approaches and strategies as part of achieving success in investment matters; and (f ) to connect investment actions more closely with the broader context of Canada-China ties.

Reflecting on some often difficult events and controversies in Canada of the past year over CNOOC/Nexen, FIPA, HD Mining, Huawei etc., Forum participants examined welcome progress made on a number of issues raised in 2012. Canada has proven attractive to Chinese investors. By 2012, FDI stock in Canada grew rapidly to US$44 billion, driven primarily by M&A activity in the energy and resource sector (Heritage Foundation estimates US$37 billion) - exceeding FDI placed in the US. This indicates broad confidence in Canada’s economic environment and its interest in what Canada offers relative to China’s needs. A FIPA has now finally been signed by both governments and an approval was given by the Canadian Parliament (though, at this writing, still not formally ratified by Canada). New investment rules have been established, increasing the threshold value for review of most investments, i.e. a net liberalization, while clarifying rules for State-Owned Enterprises (SOEs) in the oil sands insofar as controlling positions are involved.

At the same time, other issues are, at best, a “work in progress” and new challenges and imperatives have ap-peared. Public opinion toward Chinese investment has
hardened in Canada. This inhibits governments in furthering our economic ties. It is essential that positive experience with new Chinese investments be achieved
and that its benefits be evident to all through effective communication, public education, more balanced media coverage and by well-benchmarked observance
of Canadian laws and standards. We all need to be guided by analysis of trends, rather than transactions and emotions.

We need a more nuanced, accurate understanding of SOEs – how they behave and what they offer. What counts is that they be held accountable to shareholders
for their commercial and management performance, and to our public in observing our labour, safety, environmental and transparency rules. In terms of our economic development goals, there is more to do in moving from M&A to greenfield enterprises and expansions, in attracting more investment in manufacturing and value-added service sectors, and in using investments to deepen Canadian business involvement in the global value chain. While strict, contractual reciprocity may be unrealistic, additional progress is needed in opening a number of Chinese sectors, including resources, to Canadian participation, and in strengthening intellectual property protection – a matter that is in both the Canadian and Chinese interest.

It was the sense of the Forum that these issues, while serious and in need of further attention – with more analysis and less emotion - can be addressed successfully. It was acknowledged that Chinese SOEs may well not bring the same level of benefits in management or technology with their capital as do OECD nations, and that legitimate concerns exist in certain sectors. Notwithstanding the concerns, however, there are grounds for optimism that the investment relationship between Canada and China can and will develop over time:

• First, Canadian firms in the energy and resource sector are creatively developing partnerships in the post-Nexen setting, while Chinese entities are open to such minority positions and joint venture arrangements. Opportunities exist to reduce public concern over “dominance” of key sectors and to pursue and demonstrate that “best practices” are being implemented;

• Second, the dynamics of China’s economic development and financial circumstances are such that outward investment will grow. This provides advantage
to Canada if smartly pursued. With limited earnings on US treasuries , with higher profits available to SOEs abroad, and with ongoing needs in the resource sector
and emerging requirements to move to higher value added engagement and brand recognition, US$5 trillion of Chinese capital may be available over the next 7-8 years

• Third, the early signals are that the commitment to “opening” and reform in China under the new leadership will endure. In conjunction with moves to
internationalize the Renminbi, this orientation will lessen bureaucratic restrictions on outward investment approvals over time as well as diversify investments undertaken, and increase their sophistication.

Canada remains in a competitive setting in attracting, retaining and diversifying Chinese investment. Our advantages are significant but cannot be taken for granted. Our brand is important and, for this reason, we will need to address ongoing issues of clarity in post-Nexen concepts – e.g., what constitutes “strategic assets” and “control”. We will need to show progress in addressing infrastructure constraints. As in 2012, a number of Forum participants voiced the need for investment policy and promotion to be better integrated with a broader China strategy – and indeed to develop and publicize such a strategy.