Scene Setting Paper

2016 Investment Banner

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

The China Investment Forum occurs amid considerable unease over China's economic outlook, a diversity of impacts on Canada's and Alberta's economy, continuing public controversy over Chinese investment, and the concomitant policy responses appropriate for Canada. Despite the complexities and uncertainties, the challenge remains to sustain engagement with China and ensure advantage is maximized for Canadians, while addressing risks at hand and public trepidation. Two-way investment is an essential part of that engagement and in the maturing of our economic partnership. The 2016 Forum will look at four sets of issues facing government and business in approaching an evolving China,against a background where Canada's new Government may be moving towards a closer economic relationship with China.

Panel One: China's Economic Realities: Hard Landing or Structural Adjustment?

Perhaps too much of our appreciation of China's economic trends has been informed by financial or commodity market media reporting, with a focus on the short term and with authors not necessarily well-versed in recent Chinese economic history or business behaviour. This was fed by wild swings in Chinese stocks in the past year and by interventions undertaken by the PRC government, including on exchange rates. Plant closures and layoffs, of which many were significant, were portrayed as evidence of collapse. Industry over-capacity and high debt levels were taken as signs of impending doom. Attempts to bring in the "bigger picture" structural dimension, while commendable, tend towards simplified generalities about China's drive from an investment-based to a consumer-based economy.

Nevertheless, clearly China is encountering head winds and real tests to its "growth model". Policy measures have been at times uneven and unclear, perhaps reflecting ongoing divides within China on the best courses of action. Even small dips in GDP growth, for example from 7 to 6 % or even lower, given indicators such as drops in internal freight and electricity use, have consequences for Canada, in terms of commodity prices, for exports, and potentially for investment abroad, both its level and configuration. Conditions in China also affect the viability of Canadian investments in China. So concern is reasonable and real challenges exist for policy development and business strategy.

It is hoped that exchanges at the Forum will lead to insights on what to expect. What do participants consider is the nature and severity of China's downturn? Is it overstated? Is it cyclical with a good prospect of reversal upward in the short to medium term? Or is it a game change, an emerging megatrend, directed or otherwise, in a developing economy maturing toward a more sustainable rate of growth? What new strategies for business planners and public policy practitioners may be required?

Panel Two: The Emerging Shape of Risks and Opportunities for Canada

In both worst and best case economic scenarios, China is an irreversible fact of Canada's business setting and value chain structure, exponentially more so than 10 years ago. While vulnerable to downsizing and consolidation in China's heavy industry sectors, volumes traded in key commodities have shown less volatility than prices. Oil imports in China in 2015 were actually up 8% over 2014, and energy security will remain a long term Chinese preoccupation despite investor angst over low prices, profitability, and tidewater links. Infrastructure needs together with related technology and services remain profound. Specialized areas such as goods and know-how in high quality food, health care, environmental and clean tech, and financial and business services will only grow. Investment in China in conjunction with a full range of creative SME-accessible business tie-ups are inevitably a key part of this encounter, albeit with premiums on sound risk assessment. The Canada-China Foreign Investment Protection Agency (FIPA) does help stabilize the environment; it does not of itself harmonize different systems or guarantee satisfactory dispute settlement. Still, Canadian FDI in China topped $4.9B in 2014 up 26% over 2013.

How do participants assess the outlook by sector? In what sectors are Chinese investors, in the midst of a transitioning economy, likely to be most receptive? Is it only in energy which does occupy by far the largest share of present investment stock - close to $50B of the $65B total - or among new sectors such as commercial or residential real estate, as well as certain areas of advanced manufacturing and services? Can or will Chinese investment align with "diversification" objectives that we may have? What are the proper expectations of Chinese FDI in Canada - capital for key projects; strategic connections? It has been argued that Chinese offerings in technology, process innovation and management practice may be either weaker or less compatible than those of other investors. Are issues of SOE governance, intellectual property and dispute settlement manageable, and how? What is China's "performance" on issues of local hiring or R and D, or on broader policy considerations in Canada such as worker safety, environmental protection, or housing affordability in major urban markets?

Panel Three: China as a Global Investor: Evolving Trends

While representing less than 8% of global FDI stock, and only if Hong Kong is included, China by flow at US116B annually as of 2014 (UNCTAD) has emerged as the world's third largest foreign direct investor. It is the second largest and close to US$258B if Hong Kong is included. The basic thrust of China's "Go Global" policy is intact, as is a commitment to a greater role for market factors in determining investment decisions. Some believe the reforms have not gone far enough, for instance in the financial system and with respect to SOEs, or that internal debt pressures are being insufficiently addressed. However, in regard to overseas investment, while strong measures of control and oversight from the centre remain for larger investments as do strategic policy imperatives in such sectors as energy and key commodities, decision-making continues to devolve. Moreover, there is a stronger role for companies that are private, or at least more private, in nature. In Canada newer Chinese investments are more likely to be "private" though smaller investments and SOEs still dominate, driven by the energy sector.

China's foreign reserves are down from their mid-2014 peak of $4 trillion to US$3.2 trillion but still the world's largest. There have been some pull-backs and down-sizing in response to poor results in Canada as in other parts of the world. Flows to Africa, for instance, have fallen sharply in the past year, but this is more than offset by growth in investment in the US. In aggregate, outward direct investment continues to grow and, again, is well anchored in Chinese policy and as part of business practice.

In assessing future opportunities, the Forum may wish to discuss in which areas Chinese investment may have highest value for a Canadian industry - and conversely where a Canadian partner or location may most likely prove a "solution" for a Chinese enterprise. As there is competition globally, is there a role for proactivity and, if so, how in seeking Chinese investment, and what the best strategies and optimal sector targets may be? What is the character of new investment - more joint ventures, more M&A, or more greenfield? Are governance models evolving and, if so, how? What drives changes in sector emphasis or models used: access to technology, brand development imperatives, North American positioning, and so forth?

Panel Four: Public Perceptions and Regional Perspectives

Polling shows Canadians, notably in the West, are cognisant of China's importance as an opportunity. According to the Institute's own surveys, Albertans are still ahead of the curve in welcoming China ties. Yet Canadians remain uneasy over China, especially on direct investment. If anything, they are becoming less so, including Albertans whose support for Chinese investment dropped 12 points to 43% in 2015 from 2011. The Asia Pacific Foundation of Canada 2015 survey showed similar numbers nationally, driven by mistaken beliefs that Chinese investment is 25% of FDI. The real figure is 3%.

For China, ambivalent messages from the CNOOC episode, new Investment Canada Act SOE rules, and infrastructure delays colour perceptions of Canada. Yet China does continue to invest, if in projects of smaller scale and in a new diversity of industry sectors and geographic locales in Canada. The Institute's investment tracker puts the stock of Chinese FDI in Canada at C$65.8 billion. For perspective, Canada is relatively open and rules-based compared to China's business setting which, despite some improvements, remains more restrictive and less transparent.

Participants may wish to address how best to work with Chinese investors and officials to ensure the best possible business outcomes and the best possible social acceptance, showcasing where performance has matched that of other investors. Participants may consider how, working with our embassy and provincial offices, better business experiences and greater transparency can be secured on the ground in China, with lessons learned and successes shared. Beyond the FIPA and the uncertainties facing the Trans-Pacific Partnership (TPP) and the unlikelihood it will include China in the near future, is it in Canada's interest to begin exploring how to bring further stability and competitive advantage for Canada with China through more codified approaches to the Canada-China relationship, including a possible free trade agreement?

Moving forward….

What are the key elements of a forward agenda? What is most needed in order to maximize opportunity and positioning for Canadians in the China economic colossus while securing basic interests and values and managing risks? Ambition and innovation are essential. Yet bigger, more transformative policy changes, such as an FTA, will require greater consensus among Canadian stakeholders and the general public. The Institute's report will attempt to summarize the elements of such a forward agenda that can be extracted from the Forum discussion.