Summary Report

2016 Investment Banner

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

Acknowledgements: Anya Kutuleva, PhD Candidate, Doctor of Philosophy-Political Science, University of Alberta

On May 6, 2016 in Calgary, the China Institute at the University of Alberta convened a group of some 90 private sector representatives, government officials and members of the academic community to consider recent trends in China's economy and overseas investment, and their implications for Canada's engagement with China. The aim was to develop a clearer understanding of these developments, and to advance specific approaches that may be applied in the months and years ahead as China's economic transition proceeds, and as Canada's own needs evolve.

This year's Forum occurred against the backdrop of significant global scrutiny of and concern over economic and financial market conditions in China. While the spectre of a looming crisis was felt to be exaggerated or misplaced by a number of Forum participants, growth is slowing and risks are feared to be higher than in recent years - a "new normal" for trade and investment, as one speaker suggested. Despite a strong first quarter of 6.7 percent growth, one based at least partly on easy credit and public sector spending, growth in the 6 to 6.5 percent range is more likely in the medium term.

Given the importance of the resource sector for Canada, the evidently slower industrial growth and the avowed intention in China to shift from an investment- to a consumer-based economy's effects on commodity prices are a natural focus - as is turbulence in Chinese capital markets over the past year. These circumstances affect both China as a market and as a source of investment for Canadians over the near to medium term.

The Forum attracted numerous distinguished speakers, led by the Hon. Deron Bilous, Alberta's Minister of Economic Development and Trade. Given the tragic situation unfolding in Fort McMurray and environs, the presence of the Minister, the commitment shown by him and his senior officials to the progress of future Canada/Alberta-China ties, as well as their vision of continuing specific opportunities, were deeply appreciated by participants and Forum organizers.

Other distinguished key-note speakers included Mr. Dave Murphy, Minister (Commercial) of the Canadian Embassy in Beijing, and his counterpart in Ottawa, Mr. Xiang Xia, Minister Counsellor - Economy and Commercial of the Embassy of the People's Republic of China. The Forum was also pleased to welcome Dr. Derek Scissors, Resident Scholar at the American Enterprise Institute (AEI) in Washington DC, who has pioneered an innovative China global investment tracking project offering insights on the growth of Chinese investment abroad and its diversification by sector and mode of transaction.

Reflecting the complexities of the issues, the Forum was organized into a series of four panels designed to address specific themes relevant to public policy and business strategy in relation to China.

In the wake of concern over recent economic trends in China and their implications for Canada, the first panel looked at China's Economic Realities: Hard Landing or Structural Adjustment. It was agreed that there are negative recent trends, with overcapacity in some sectors, significant layoffs, and emerging concerns over internal debt levels. An implosion still appears unlikely despite popular speculation in the West and the aforementioned instances of capital market turbulence; nevertheless, China does face a difficult transition. There is uncertainty that reforms are sufficient to overcome the full range of industry overcapacity, financial pressures and demographic challenges. Doubts also continue to persist on whether, in the near term, the policy tools in place are fully adequate to address downturns or rebalance capital markets in a sufficiently well-targeted and measured manner.

Yet the fact remains there is significant growth, in comparison with other major economies and over the long term, with a belief that China will prevail as one of the world's two leading economies. Even with a 6 percent growth rate and periodic downturns, China will generate US$750B in added global demand in 2016 and substantive annual growth, and this trend is projected to persist over the next decade. The trend continues to be an upward one, and China's role and impact will remain global in scope. Moreover, as a number of Forum participants considered, the focus on GDP is excessive and misleading. Sector-by-sector trends are afforded insufficient attention in such calculations, especially given the diversity of ways China's transforming economy creates value of real consequence, and in relation to how business opportunities affect export markets and investment behaviour.

With the Chinese economy not imploding but definitely shifting, the second panel examined The Emerging Shape of Opportunities for Canada. Though Chinese initiatives such as One Belt One Road may present a competitive challenge for Canada due to capital diversion and the development of alternate commodity sources in Asia, energy and resources will remain critical for Canada, particularly for Western Canada. All regions, and many sectors, must and can position to respond to evolving trends in China, not only its economic realignment but also the ongoing expansion of the middle classes. These changes will involve not only trade in goods - and in value added foods and forest products - but in services and investment. There are progressively more innovative potentials in the offing, such as equity infusions, for commercialization that firms need to grow.

As highlighted inter alia by Minister Bilous' March visit to China, there are significant opportunities arising from urbanization, as well as in high tech and clean energy, and prospective opportunities for high quality foods (e.g. beef), as well as in tourism and education services. China is Canada's second largest tourism spender and provides 1/3 of all international students, and is increasingly an innovation centre, and this, along with e-commerce platforms, is becoming a new reality, notably for Canadian SMEs.

The context of China's own needs and investment orientations was explored by the third panel China as a Global Investor: Evolving Trends. Though energy security remains a fundamental Chinese preoccupation and the sector continues to dominate the stock of China's investment in Alberta, the energy boom has atrophied, for now, as an investment focus. This trend is even more observable in Australian figures for conventional energy and for resource sectors in general, whereas real estate, renewables and health care have risen sharply in recent years. In fact, Chinese direct investment abroad has diversified at a global level.

In Canada, the stock of Chinese investment according to CIUA estimates is C$65.8B or US$62B. The trends are important however. Energy investment dropped from US$10.7B in 2010-12 to US$3.2B in 2013-15, perhaps not surprising with the CNOOC/Nexen deal "done" and oil patch investment down from all sources. As shown by both the China Institute in relation to Canada and by AEI globally, the private sector is rising as a share of total transactions in Chinese investment abroad. In terms of "diversification", as with Australia, and the US, Canadian figures on recent flows show greater interest by Chinese investors in real estate, high technology, agriculture/food, and service sectors. Investment remains largely M&A, yet greenfield projects are increasing.

Against the backdrop of continuing low poll support for expansion of ties with China and trepidation over Chinese investment in particular, the fourth panel Public Perceptions and Regional Perspectives discussed the next steps necessary to build and demonstrate success with Chinese partners. While sobering, polls can be misleading. China is indeed "controversial" at several levels of public opinion in Canada and elsewhere, particularly when it comes to investment by Chinese SOEs. However, polls are vulnerable to weak levels of awareness of facts - such as the belief that China represents 25 percent of all foreign investment in Canada rather than the real figure of 3 percent. And they may also reflect a broader unease over foreign investment in general and perceptions of higher risk of dealing with Chinese and other Asia Pacific partners as compared to more like-minded partners closer to home.

Nevertheless, public attitudes and knowledge levels do impair the ambition and the effort necessary to match our potential in China, to mature relationships, to clarify our "message" and "brand" and, above all, to meet the competition we face whether for markets or investment. Awareness, it was noted, is not only a matter of social license. Successful business development with China requires a premium on cognisance of the practicalities, imperatives and competencies, at the micro level, in meeting the needs of Chinese business partners, and ensuring good deals for all sides. Above all, there is a necessity to recognize that China is a source of capital that Canada and Alberta very much need, and a parallel necessity to educate the public to this reality.

Awareness also involves effective engagement of local communities and collaboration among the diversity of economic players and levels of government in Canada. This is essential in supporting coordinated approaches and sound messaging in promoting business development opportunities with China in a smart, inclusive and forward-looking manner. Political or business risk reservations may still exist about some aspects of doing business with China, but can be surmounted; this is indeed what Calgary, and Calgary Economic Development in particular, is doing - and with solid successes evident already or with clear prospects - increasingly with excellent local support.

At the national level, to keep pace with our competitors and our potentials, the case was made for a comprehensive high quality economic and trade accord with China. Ideally, such an accord would cover the full range of economic interaction between Canada and China. In this way its content would reflect that services, in all forms, play an ever larger role relative to trade in goods. It would reflect the emerging Canada-China reality - that information technology, transport, innovation linkages, regulatory issues, and supply chain efficiency, particularly in the field of investment, have become increasingly critical in determining to what extent success can be built. Clearly, a dynamic interface of public consensus and regional engagement is essential to the enabling environment we need with China. Given prevailing attitudes, this path to a comprehensive agreement will require involvement, and indeed leadership, from all levels of government, business, academia and other stakeholders.

This note has not captured all thoughtful comments made by participants nor does it represent a set of agreed conclusions of the Forum. It does seek to encapsulate the most common threads of discussion. In so doing and moving forward, the note together with presentations and comments made at the Forum may serve: (i) to bring greater insight into recent economic trends in China and its investment abroad; (ii) to guide interaction with government and business leaders in building viable China strategies that mobilize a broader cross-section of Canadians; and, (iii) to assist in conveying to present and potential Chinese partners the elements of a clearer message on Canada's commitment and its business advantages.