Scene Setting Paper

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

Canadians are gradually showing greater appreciation of the role of China and other emerging economies in our future. Yet Chinese investment, above all investment by state-owned enterprises, has engendered continuing controversy - to a degree that it impairs the development of our broader relationship. The unease is reflected in polling, media commentary and political discourse.

At times, impressions and emotions have overtaken facts. Concerns arising over degrees of "dominance," worst case scenarios of corporate behaviour, or the loss of strategic sectors have seldom, if ever, been validated. Yet fears persist, grounded in concerns among many Canadians over control of natural resources, protection of intellectual property and even national security. Anxieties arise from economic systems that remain different than those to which we are accustomed in North America.

This scene-setter will attempt to situate our discussion in Toronto with a fact-based look at recent trends. We will also pose some questions in need of reflection, whether by government, by economic development authorities at all levels, by businesses of various sizes looking for sound strategies and partners in China or by academic and research communities looking to provide a clear understanding of what is and is not happening. Understanding the investment landscape is critical to the successful navigation by and the best of outcomes for all stakeholders.

First, the setting is one of a global expansion of Chinese investment worldwide, and indeed, as part of the "Going Out" policy, the encouragement and facilitation of that investment as both part of a strategic response to specific Chinese needs and as a dimension of China's ongoing economic restructuring and efforts at strengthening the role of market factors in decision-making.

Well managed and with the safeguards of host nation legal systems preserved, China's foreign exchange reserves, averaging $3.5-4.0 trillion in recent months, and its gross saving rates of over 50 percent of GDP are global assets and provide opportunities for Canada. Well directed, they present Canada with options for sustainable resource development and diversification of our economy and our trade that, in turn, respond to a changing global environment in which China and the other emerging economies of Asia play increasingly crucial roles, as both markets and sources of capital.

China's preoccupation over security of resources, its interest in cleaner energy, its quest for technology, and its need for better returns on capital are fundamental, large scale and long-term drivers of its investment abroad. To be certain, there are recent setbacks in Chinese industrial, trade and other economic indices. Some are cyclical and some are structural in character. Some are externally-induced and others of domestic origin. They may inspire caution. What they do not indicate, contrary to some western media coverage, is that a hard landing or worse is at hand. As China's economy matures and its government seeks a sustainable balance between investment and consumption, China's days of double-digit or even high single-digit GDP growth rates are likely past. Yet this does not alter the reality of China's progress towards being the world's number one economy, much less the narrative of its outward-oriented expansion and the key role of direct investment abroad therein.

At a global level, the stock of Chinese direct investment abroad had reached over $610 billion by 2014, close to 25 times the level of 2000. Based on UN statistics, this stock remains less than 8 percent of the global total - even when China and Hong Kong are combined. Nevertheless, Chinese FDI flow rose to $116 billion in 2014 alone, twice the level since just 2008. This makes China now the world's third largest investor. China and Hong Kong together are the source of close to 14 percent of global flows.

The Forum will include a presentation on the China Institute's "Investment Tracker" project. In Canada, the documented stock of Chinese investment reached a level of CDN$53.7 billion in 2014. Chinese investment remains heavily focused on natural resources (especially energy), and like all investors China is facing pressures in these sectors, particularly given price movements and cost factors. China's investment is also gradually diversifying, to other sectors, notably finance and business services. SOE deals, mostly M&A, lead by value, though other modes of investment are appearing, with private Chinese companies and funds beginning to take a larger role and with portfolio investment transactions taking on a greater profile. At the Forum, we will examine a number of issues regarding and trends in Chinese investment in Canada and the role of investment more generally in our relationship with China.

Under Panel 1, Implications of Declining Oil Prices: The Future Outlook for Chinese Investment in Canada, panelists will be encouraged to share their views and hear from participants on the extent to which we can expect Chinese confidence in the Canadian energy sector to endure given the present price and cost crunch - and what steps may be necessary, given the competition faced and the alternatives available, to ensure the right signals are sent regarding Canada as an investment environment. For instance, how shall we manage new Investment Canada Act rules, calibrate royalty policies or performance requirements, or address other concerns, such as those arising from infrastructure weaknesses?

Panel 2, Chinese FDI: A Global Outlook - The Legal and Policy Environment will, as its title suggests, take a high level look at the worldwide context of where Chinese flows and constraints present themselves - whether through economic or policy constraints. Is Canada's practice on foreign investment review in line with or an outlier with regards to international practices, and if the latter, what may be the consequences as competition for Chinese capital possibly increases? How might Canadians best understand and benefit from the recent loosening of restrictions on investment abroad, especially by Chinese private firms?

With Panel 3, Innovation and Investment, panelists will look at new frontiers of Chinese investment, worldwide and in Canada. How might non-resource sectors benefit? How can state-owned, state-linked or private players from China be encouraged to align with Canada's innovation and productivity agendas? For Canada's knowledge sector players, is China an underestimated global platform, and how might this be adjusted? What are the strategies needed to communicate Canada's advantage in these sectors, and thereby mobilize a wider field of potential Chinese partners and financial institutions? What are the options to manage risks, real or perceived, over trademark and IP protection?

For Panel 4, Private Enterprises and SOEs: Is the Face of Chinese Investment in Canada Changing?, participants will examine whether diversification to a wider variety of sectors and business models is happening in Canada. Are we seeing more creative partnerships and financial tools? How is mutual awareness built among Chinese and Canadian business communities? What seems to be working well - or otherwise - as this occurs? Are we seeing behaviours by Chinese entities, SOE or non-SOE, that suggest a truly commercial orientation, and how might government, business and financial markets best respond to our mutual and competitive advantage?

Given past controversies and some continuing unease, Chinese entities operating in Canada can assist, not only by projecting a truly commercial approach, but by being able to continue demonstrating compliance with Canadian laws and an effective adaptation to local and global business practices - whether financial transparency, labour standards, or on matters of environment, health and safety. Particularly with the ratification in 2014 of the Canada-China Foreign Investment Promotion and Protection Agreement (FIPA), the experience of Canadian firms in China must be seen to improve meaningfully - in basic access, in day-to-day operations, and in dispute resolution.

There are a number of other specific issues worth tracking in the future. They include the greater use of the RMB in trade and payments internationally; perhaps particularly important in Canada in light of the establishment of a North American RMB trading hub in Toronto in March of this year. They also include the extent to which Canadian and Chinese business will or will not progressively find integrative business models to their advantage when it comes to growing their firms' production capacities and market presence while managing risks and building competiveness -perhaps leading to a sense of emerging best practices.

Moving forward and past the CNOOC/Nexen aftermath, related controversies of 2012 and the more recent stresses of lower resource prices, the Forum will hopefully point to directions for both Canadian and Chinese business to go forward. With the conclusion of the FIPA, implementation of changes in Canada's investment policy framework and liberalization of Chinese outward investment rules, all representing modest but significant positives, it will be important to see a period of consolidation, clarity and predictability. Such conditions would align with the importance of investment in our bilateral economic relationship as well as with the supply chain needs of our respective economies in a challenging global setting.