National Canada-China Economic Forum

Scene Setting Paper

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

This third China Investment Forum occurs amid heightened public policy discourse on future Canada-China economic relations. Last August, the joint Canada-China Economic Complementarities Study was released outlining seven sectors of opportunity for growth in commerce, potentially setting the stage for more ambitious trade and investment arrangements. Last December, in the wake of the controversial Nexen and Progress Energy deals, new rules for takeovers by foreign State-Owned Enterprises (SOEs) were announced by the federal government. While still awaiting ratification by Canada, the long-delayed Foreign Investment Promotion and Protection Agreement (FIPA) has been signed by both Canada and China.

The energy and resource sectors have been at the centre of public and media attention, particularly given ongoing concerns over the long term demand outlook in an increasingly energy self-sufficient US (highlighted by the IEA November 2012 report), the dramatic growth in demand of China and other emerging economies, and issues of pipeline and other infrastructure affecting access to both US and Asia Pacific markets. Moreover, Canadian oil producers, facing rising costs, are receiving discounted prices for their products – a situation mirrored by weaker prices for a range of commodities of late.

In this context, public policy challenges have become more pressing as the choices facing the energy and resource sector have become especially urgent. New markets are needed and capital to develop the resources is imperative. While other sources of funds are available and from institutions less affected by concerns over national security or corporate practices – and the risks so associated, the fact remains that, with over $3.2 trillion in foreign reserves, China, Chinese SOEs, and Chinese private firms represent the largest available pool of additional investment in realizing the potential of Canadian resources.

Against the backdrop of these issues, public attitudes toward Chinese investment and, in particular, to investment by SOEs may have become less “enabling”. Even in Western Canada, habitually more “open” and supportive of expanded ties with China, including investment ties, has seen some tightening of attitudes – even since 2011. The China Institute’s annual survey in 2012, notably taken immediately before the CNOOC/Nexen takeover proposal was first announced last summer, showed that only 15 percent of Albertans supported full ownership of an Alberta-based company by Chinese SOEs, while support for partial ownership was evenly split. There is also heightened scrutiny in Canada and elsewhere of what is viewed by some as less-than-ideal conditions in China for Canadian and other foreign investors.

In assessing the first agenda topic, Recent Developments in Chinese Investment in Canada, it is evident that Chinese investment in multiple sectors is continuing to expand. The image of galloping gains in the profile of Chinese corporate entities abroad appears to be exaggerated by the media and the Canadian public. In fact, according to the UNCTAD 2012 Report, less than 7 percent of foreign direct investment stock worldwide is of Chinese origin (the Chinese mainland and Hong Kong combined).

However, it is the trends that are significant. From a low base, China is expanding its overseas direct investment, driven by its own quest for stable supplies of energy and other resources, but also by competition generated by similar considerations by other G20 economies. These broader strategies include positioning China effectively in global value chains, innovation networks and financial centres. Recent steps by China’s National Development and Reform Commission (NDRC) will streamline approvals and the number of qualified investors will be expanded.

In 2012, the Chinese Ministry of Commerce statistics would indicate that outbound direct investment flows outpaced inbound flows for the first time, reaching US$77 billion, 29 percent over 2011, although other Chinese players indicate that this transition will only be reached in 2015. According to the 2012 UNCTAD Report, the stock of Chinese investment abroad was at $366 billion, 23 percent higher than 2011 and over 13 times greater than in 2000.

The stock of Chinese investment in Canada reached US$10.7 billion by the end of 2011, a 36 fold increase over the past ten years - again, to note, from a very low base. (There are reasons to view the 2011 estimate with caution – and the actual number is probably far higher.) The real challenge may be whether Canada is performing as well as it might in attracting new investment from China The second challenge is whether Canada will be effective in sustaining and diversifying existing investments. Undeniably, 2012 was a big year. One US firm (Dialogic) calculates that the effect of recent purchases in Canada may have caused a rise in FDI stock by over $20 billion (96 percent of this in the energy sector). Remarkably, this amount would be equal to the total of that received by the US and Australia combined in 2012.

Our second topic, the Public Policy Implications of Chinese Investment – Experience and Challenges, will be shaped by how both Canadian and Chinese firms, and our respective authorities in the wake of the CNOOC/Nexen approval, implement the related new framework for SOEs – and by evolution in Canadian public opinion toward such investments.

Apart from whether the new rules add as much clarity as may be desirable in “net benefit” assessment crite-ria, there are legitimate questions related to current practices of decision making on investment approvals under the Investment Canada Act. These include the question of whether “net benefit” calculations take sufficient or accurate account of the circumstances facing Canada’s resource sector. The extent to which federal foreign investment policy and practice should “drive” energy and resource policy is a fair question, particularly given the constitutional primacy of the provinces in these sectors.

As noted above, increasing attention is being paid to conditions of doing business in China as well. Do Canadians face undue restrictions in their China investments? Has the rule of law strengthened sufficiently in China to a degree wherein operating risks (one example is intellectual property protection) are more acceptable? How can these issues best be reflected in future policies and strategies? Are concepts of “reciprocity” worthy and feasible tools in leveraging rule changes desirable, or is FIPA-based progress on national treatment, non-discrimination, and transparency more realistic? Will the FIPA prove adequate in helping to resolve individual problems encountered by companies, and, at least incrementally, improve the investment environment? As with inbound investment from China, assessments of risk in doing business inside China will be improved by positive experiences - specifically by encountering fewer barriers over time and/or being able to more readily resolve issues when they occur.

Our third topic, Understanding State-Owned En-terprises (SOEs), is especially acute with respect to creating more positive public opinion toward Chinese investment. While in 2011, only 23 percent of Albertans opposed Chinese investment in the energy sector, one year later with the survey question adjusted to refer to Chinese SOE investment, 53 percent said they were opposed.

Evolution in both the public image of Chinese SOEs and their governance could shift public attitudes in Canada. Increased confidence and agility has been displayed by Chinese entities, both state-owned and private, in the establishment and operation of overseas subsidiaries and in adapting to foreign business environments. This includes the observance of the rules and practices of the host nation as distinct from the source nation.

Beyond that challenge, there is also one of ensuring how to make the December 2012 SOE rule adjustments work for Canada. What needs attention at the implementation stage is how and perhaps whether the adjustments can or should be applied to deal with sectors and scenarios outside the oil sands.

In strategic terms, how can we make the most of joint venture/minority partnership scenarios? As a first step, an expanded working knowledge base among Cana-
dian officials and our private sector on SOEs and how they operate will be highly desirable. This can help ensure that SOEs become a “bridge” in both directions, serving trade, investment and broader value chain integration objectives.

Our fourth topic, Future Prospects for Chinese Investment in Canada and Alberta, will be shaped both by public policy developments in Canada and China and by global trends in sectors.

Whether in resources, industry or services, Chinese investment in Canada - as well as an expanded Canadian business presence in China – is integral to the effort to adjust our resource industry to patterns of growth in the world economy, and to position Canada closer to the centre, rather than the periphery, of global value chains in which China plays such an increasingly decisive role. Properly assessed, Canadian professional and country expertise, notably in the resource sector, represents a potential winning match with Chinese capital.

A stronger national consensus on Chinese investment is much needed, and should be accompanied by effective communications strategies. These efforts in turn will be sustained, or otherwise, by solid evidence of economic benefits and “good corporate citizenship” by Chinese entities in Canada and by improvements in the experience of Canadian firms in China. Related and supporting measures in such areas as visa policy and infrastructural improvement will benefit from improved coherence with investment policy and promotional efforts.

Recent polls notwithstanding, Albertans continue to strongly support expanded ties with China; only 20 percent consider China “a threat” to Canada. Canadians in general are similarly positive, albeit more at an abstract level, than on specific questions such as resource ownership profile, labour and reciprocity. Within the energy sector, the federal government’s CNOOC/Nexen and Petronas/Progress Energy decisions appears to have calmed waters for the time being. Yet public debate across Canada continues, aggravated by issues of cyber-security, intellectual property and labour/visa policies. Deeper public knowledge by Canadians on both the benefits and risks of Chinese investment would be helpful. The demonstration of good corporate citizenship and outreach by Chinese firms is essential.

Above all, we cannot proceed in a vacuum. In building consensus, provincial and industry voices can provide needed knowledge to the current less-than-inclusive decision-making process and to the consideration of how “net benefit” can be optimized. Viewing investment decisions as part of, rather than separate from, broader resource and other sector development policy is desirable. Finally, investment approval decisions and investment promotion activities must relate to strategies we have, or should have, for further developing the overall Canada China relationship