By Ron MacIntosh, Senior Fellow, China Institute, University of Alberta
On May 8 2015, the China Institute at the University of Alberta (CIUA) convened a group of Canadian and Chinese business and professional representatives, members of the academic and research community, and federal, provincial and municipal-level economic development officials in their personal capacity. During four expert panels, the Forum featured a wide-ranging exchange on the trends and issues – and sometimes the controversies – surrounding Chinese investment in Canada.
Amid concerns over China’s growth outlook of late and the impact of lower oil and other resource prices on investors in Canada, the most significant recent developments are the emerging importance of the private sector in Chinese overseas investment activity, the increasing diversification of such investment to non-energy sectors and the rising interest shown by Chinese firms in other parts of Canada and, as noted below, increased interest in Chinese investment by a wider variety of locations in Canada.
For these reasons, the CIUA decided to hold the Forum in Toronto for the first time, Canada’s largest city and its industrial and financial centre. While, as speakers noted, its full impact is to be determined, Toronto is also the first RMB trading hub in North America and, as such, a much-needed point of engagement with China’s emerging and maturing capital market.
The Forum benefited from a thoughtful keynote presented by David Mulroney, Senior Distinguished Fellow of the Munk School of Global Affairs, recently-appointed President of St. Michael’s College and Canada’s former Ambassador to the People’s Republic of China (PRC). Mr. Mulroney highlighted the importance of a coherent and strategic approach to the bilateral relationship as a key element in the success (or otherwise) of our investment ties. He stressed the need for enhanced “Asia competencies.” He praised the work of provinces and municipalities in promoting Canada-China relations and that of universities in promoting policy development work that is otherwise not being done nationally.
Chinese representatives in Canada have attended each of the five Forums and their support has been invaluable. On this occasion, Mr. Yu Benlin, Minister Counsellor, Economic and Commercial Affairs, Embassy of the PRC in Ottawa delivered luncheon remarks. Mr. Yu stressed the diversification by sector and type of firm in Chinese investment occurring and the facilitation in the policy environment for outward investment. He flagged the importance of contributing to local communities, including First Nations. While upbeat on the Canada outlook, perceptions and messages sent are important. Yu noted that these include not only restrictions on state-owned enterprises (SOEs), but effective access to skilled labour pools and infrastructure availability.
Statistical trends were cited from the CIUA “China-Canada Investment Tracker” exercise. They show that Chinese investment by SOEs in the energy sector continued to lead in value and by a large amount, even after the drop-off following the Nexen acquisition. Nevertheless, the number of transactions overall is rising and the number of those originating in the private sector has been rising fastest of all. The numbers in the Tracker are impressive with investment, including portfolio placements, indicating a higher level of FDI in Canada, at $54 billion, than official estimates. Even this higher estimate is likely understated.
Through panels convened on resource sector pressures, legal and policy development, innovation and private vs state-owned investors, the lively discussions throughout the day featured a sense of the long term nature of Chinese investment as a prominent and growing reality of global finance and industrial development. It is both imperative and demonstrably possible to shape and direct this reality to the business-level and national advantage of Canadians while ensuring the best possible environment and experience for Chinese, as indeed for all investors.
It was argued that the economic drivers of Chinese investors are shifting from preoccupation with resource security (only) to an interest in returns on investment at both the macro and micro levels. In other words, they are more akin to investors from other jurisdictions. The question is value over volume. This requires business strategies better-tuned to Chinese ways of doing business and a sense of how Canadians and a Canadian location or partner can add the value sought. Technology access, supply chain reliability and positioning are of new importance, as is the previously noted need for infrastructure. China’s financial institutions show more sophistication and market sensitivity. One speaker advocated promotion of Canada less as an end destination but more as a strategic platform of North American and global reach.
It was recognized that public opinion in Canada toward Chinese investment, particularly by SOEs, is ambivalent at best. This remains a constraint on the development of public policy to the level of achievement by China’s other economic partners, such as Australia. Other factors such as labour supply and especially infrastructure remain at issue.
Signals sent by government are important, though their impact should be neither exaggerated nor under-estimated. In terms of trade, with the Australia-China FTA negotiations now complete, Australian investment rules are largely in line with Canada’s. Nevertheless, the seemingly China-directed restrictions introduced into the Investment Canada Act in 2013, including both the SOE review thresholds and the definition of state “control”, can affect our capacity to compete. Chinese investors do have alternatives elsewhere in the world and, again, in a variety of sectors – as was pointed out as in the Caribbean of late.
These trends are of consequence – if properly understood. Canada’s resource sector, including the oil sands, is strong and the scale of the oil sands and other resources will be of long-term interest to China. Drops in capital investment have taken place since 2012 – but so has investment from other investors in the wake of lower prices and persistent cost pressures facing a number of projects. In the meantime, a positive is that valuable experience working with Chinese SOEs was seen as deepening in the resource sector. This has the potential to be of long-term utility to China’s Canadian partners.
To maximize both the potential and benefits of diversification, we need to understand how to work with new classes of investors, to explore new financial instrumentation and business partnership models and to build engagement in value added manufacturing, knowledge and service sectors. Through creative business alliances, there are new opportunities to move forward in specific areas of Canadian excellence, whether in health, clean energy, agricultural science, fracking etc. And there are new imperatives in packaging business relationships to match the new complexity taking place in the wake of loosening capital controls in China and new roles and profiles that are appearing for institutional investors.
As noted by one speaker and with evident consensus among participants, the ownership structure of Chinese firms should be less significant to Canadians than that our laws be observed, that tax policy and transfer pricing are right and that the economic and social benefits of investment will be shared by communities. Transparency by Chinese SOEs is still a work in progress, as is protection of intellectual property, albeit with generally fewer bad experiences reported. Professional help and legal remedies are more readily available to avoid or solve problems and, while risks must be managed, the overall direction is favourable.
Certainly, improved conditions for Canadian investors operating in China are also essential to building confidence. The sense is that there is some improvement, reinforced by China’s economic and financial reforms. This trend will be reinforced by the welcome – if overdue – ratification of the Canada-China Foreign Investment Promotion and Protection Agreement (FIPA) in October 2014.
Understanding Chinese investment abroad and how it can add value to our efforts at home and across a wide spectrum of models and sectors is a matter of national interest. What is now required is smart policy and sound strategy at all levels.
The CIUA is grateful for the support of Bombardier in the staging of the Forum, and for the ongoing support of the University of Alberta and the Government of Alberta for the CIUA’s work. Above all, the Forum benefited from the high quality, well-informed panel chairs, panelists and attendees. Reflecting the strong national character of this year’s Forum, CIUA was pleased to welcome participants from across Canada with government and/or private sector representatives, not only from Ontario and Alberta, but also from BC, Manitoba, Nova Scotia, Newfoundland and Labrador, Yukon, NWT and Nunavut. The Forum also benefited immensely from contributions by special guests from Australia, Inter-American Development Bank, the Eurasia Group in Washington DC and, as noted earlier, from the Chinese Embassy.