CHINA’S STATE-OWNED ENTERPRISES
AND CANADA’S FDI POLICY
Wendy Dobson, University of Toronto†
SUMMARY
In December 2012, after Ottawa approved the takeover of Canada’s Nexen by the state-owned Chinese oil giant,
CNOOC Ltd., Prime Minister Stephen Harper offered an explanation to clarify the government’s evolving position on
takeovers from foreign state-owned enterprises. But rather than clarifying, the government succeeded instead in
adding further ambiguity to an already opaque approvals process. Such takeovers would face “strengthened scrutiny”
over the extent and nature of the foreign government’s corporate control, he said, and would only be permitted in
“exceptional circumstance.” In other words, an approvals process already contingent on subjective judgment — thanks
to the lack of transparency inherent in the pivotal “net-benefits test,” and the onus it puts on the bidder to prove itself
a worthy buyer — would now involve even more layers of subjective judgment. This is particularly ironic given that, as
Canada’s foreign-investment rules become cloudier and more prone to government interference, in China itself, regimes
governing foreign direct investment (FDI) and state-owned enterprises are becoming increasingly transparent and
market-oriented.
The government’s enhanced stringency may be a response to popular fears that China is “buying up” Canadian assets.
Such fears are, for the time being at least, overblown: China’s global outward FDI stocks are still lower than Canada’s,
and a fraction of those held by the U.S., the U.K. and Germany — although China will undoubtedly continue to expand its
foreign investment portfolio. But China’s investment strategies are little different these days than those of western
investors: China’s government has planned to reduce its role in commercial decision-making, and seems more
comfortable with allowing both nationalized and (increasingly) private businesses to pursue growth based on
maximizing shareholder value, rather than enhancing national security. Moreover, modern governance practices are now
gradually being introduced to the Chinese corporate world, with boards becoming more independent from the state, and
improved transparency in accounting and auditing practices.
Whatever worries Canadians may have about Chinese state-owned enterprises investing in Canada, raising investment
barriers is a blunt and flawed solution. Rather than block Chinese capital, Canadian regulators should monitor the
behaviour of all firms to ensure standards are met for safety, environment, labour laws, transparency and national
security. Closing off Canadian companies to Chinese bidders can hurt Canada’s economy. It could increase risk for, and
discourage, private-equity investors who often see foreign takeovers as a possible exit strategy, while potentially
sheltering poorly managed firms from takeovers, dragging down our economic efficiency.
Furthermore, Canada may well need access to Chinese capital in order for the oilsands to reach their full economic
potential. The Canadian Energy Research Institute estimates that, to achieve full development, the oilsands will require
$100 billion in capital investment to 2019. Currently, Chinese investment controls roughly two per cent of Canada’s total
FDI stocks. If that proportion remained constant, China could — based on the projected scale of its FDI by 2020 —
provide 40 per cent of the estimated funding required to optimally develop the oilsands. If Canadian markets prove
hostile, Chinese capital will, of course, find assets elsewhere. But as long as regulators enforce practices that safeguard
Canadian interests, there is no reason for Canada to impede Chinese investment. Indeed, there is good reason to
encourage it.
INTRODUCTION
The purpose of this paper is twofold: to examine (a) the drivers and future evolution of China’s
rapidly growing outward flows of foreign direct investment (FDI) and (b) the patterns and
evolution of Chinese investments in Canada and their future implications for Canadian policies.
The paper begins with the evolving role of state-owned enterprises (SOEs) as outward investors,
both globally and in the context of China’s development. It then outlines China’s evolving SOE
policies before focusing on Chinese investments in Canada in the context of China’s total FDI
outflows and China’s small relative position in Canada’s total FDI stocks (currently less than
two per cent). Significantly, as discussed in the final section, by 2020 China will be one of the
world’s largest outward investors. As the policy recommendations in the final section suggest,
Canadian policy should anticipate this trend.
STATE-OWNED ENTERPRISES AS OUTWARD INVESTORS
State-owned enterprises are suspected of defying market principles through the support they
may receive from national governments, which include subsidies, concessionary finance,
guarantees and regulatory preferences or exemptions from competition policies. Yet such
enterprises exist in many countries. OECD member countries reported in 2009 the existence of
more than 2000 SOEs, mostly in sectors considered strategically important to competitiveness
such as transportation, power generation, energy, financial institutions and partly privatized
telecommunications companies.1 The 2000 largest companies on the Forbes Global 2000 list in
the business year 2010–11 included 204 SOEs.2 Chinese enterprises were most prominent in the
group, with 70 SOEs, followed by India (30), Russia (9), the United Arab Emirates (9),
Malaysia (8), Indonesia, Saudi Arabia, Brazil, Thailand and Norway. China is of particular
interest because of its size, projected growth path and future economic significance.
Since it joined the World Trade Organization (WTO) in 2001, China’s inward FDI stock has
grown from a small base. Between 2006 and 2011 it doubled to $711 billion from just under
$300 billion.3 Outward FDI has also grown since 2006, when the government encouraged a
“going global” policy. Since then, Chinese capital has flowed abroad at a fast pace to acquire
foreign assets, particularly in the United States. Between 2009 and 2012, official data from the
United Nations Conference on Trade and Development (UNCTAD) shows that China’s stock of
outward FDI more than doubled. Because of China’s rapid economic growth (GDP grew from
$5 trillion to more than $8 trillion in this period), the ratio of outward FDI to GDP grew slightly
from five to six per cent, but was still much lower than Thailand (whose ratio was 10 per cent).
UNCTAD statistics for 2012 rank China among the world’s top-dozen largest outward
investors with its total stock (US$509 billion) representing 2.1 per cent of the global stocks
held abroad. This is still a smaller stock than Canada’s ($715 billion, or three per cent of the
total), and far behind U.S. stocks of $5,190 billion (22 per cent), the U.K. ($1,808 billion, or
7.7 per cent), Germany ($1,550 billion, or 6.5 per cent), and Japan’s ($1,054 billion, or 4.4 per
cent) (Figures 1 and 2).4 By 2020, however, as we see in the final section, China’s stocks will
be among the world’s largest.
FIGURE 1: OUTWARD FDI STOCKS BY MAJOR HOST COUNTRY, 2000-2012
Source: unctad.org/Sections/dite_dir/docs/WIR2013/WIR13_webtab04.xls, UNCTAD database,
Web Table 04, Inward and outward foreign direct investment stock, annual, 1980-2012
FIGURE 2: COMPARATIVE SHARES OF GLOBAL STOCKS OF OUTWARD FDI, 2000 AND 2012
Source: unctad.org/Sections/dite_dir/docs/WIR2013/WIR13_webtab04.xls, UNCTAD database,
Web Table 04, Inward and outward foreign direct investment stock, annual, 1980-2012
This comparison provides some perspective on such populist claims as “China is buying up the
world” or that China is “building an economic empire.”5 Two main attributes of China’s
outward investment prompt such claims. One is the speed of growth in the stocks since China’s
accession to the WTO, and the second is the frequency with which investing firms are
state-owned and seen to be playing by different rules, both inside and outside of China. Until
the major rationalization of SOEs in the late 1990s, China’s few privately owned firms were
small and focused on the domestic market; they are only now beginning to appear in
international transactions. As we will see below, private enterprises are gaining capabilities,
and the prominence of SOEs in the Chinese economy is steadily dwindling, although they
remain prominent abroad. While it was convenient to portray CNOOC’s acquisition of Nexen
(the largest Chinese transaction to date) as emblematic of SOE dominance, this transaction
should be seen in the context of more recent large acquisitions by privately owned enterprises
(POEs), also discussed below.
SOES AND CHINESE DEVELOPMENT
Following the founding of the People’s Republic in 1949, China was bankrupt and faced a
Malthusian crisis, with population growth outstripping food production. The enormous task of
rebuilding the strife-torn nation was shouldered by the state. There was one bank, which was
responsible for both monetary policy and financial intermediation. State-owned enterprises
were set up under the control of line ministries and charged with meeting output targets at
prices set by central planners. Like the agricultural communes, they had social responsibilities
to provide the “iron rice bowl” of guaranteed employment, housing, education and health-care
services for their employees. Since 1978, market principles have gradually been introduced;
while banks continue to be state owned, management is directed to pursue commercial
profitability. In the late 1990s, SOEs were rationalized with the closure, merger or privatization
of tens of thousands of smaller loss-making enterprises, many of them owned by lower levels
of government.6
Between 2003 and 2006, policy changed again, designating seven “strategically important”
sectors critical to national security in which the state was to play a leading role and SOEs were to
“grow into leading world businesses.” These world businesses would be supported by
governments to facilitate exports, acquire brands and acquire natural resources, mainly through
mergers and acquisitions. With the changeover of China’s top leadership in 2012–13, and its
emphasis on rebalancing the producer-dominated economy, the emphasis has shifted to increasing
SOE efficiency, improving corporate governance and reducing government intervention.
Today, China’s SOEs are distinguished by their ownership, with 113 very large monopolies and
oligopolies remaining in the hands of the central government and an uncertain number of
smaller SOEs owned by provincial and municipal governments. Many operate in industries
where private firms face entry restrictions. Oversight of these enterprises is the responsibility
of the State-Owned Assets Supervision and Administration Commission (SASAC). It receives
the dividends and recycles them back into SOEs in the form of financial support for
restructuring, upgrading and investments. Some reports indicate SOEs have used the funds in
ways that an investment bank would, participating in risky but lightly regulated shadowbanking
activities and setting up affiliates that make property investments.
SASAC was created in 2003 by transferring ownership of industrial SOEs from several line
ministries, allocating policy and regulation to the line ministries, responsibility for oversight of
state assets to SASAC, and responsibility for day-to-day operations to SOE managers. In 2006,
Li Rongrong, SASAC’s chairman, stated that “State capital must play a leading role in these
sectors, which are the vital arteries of the national economy and essential to national security.”7
The industries in which sole or majority ownership in enterprises was reserved for the state
included defence, power generation and distribution, petroleum and petrochemicals,
telecommunications services, coal, aviation and shipping. Central SOEs were also directed to
become “heavyweights” in “pillar” industries, including machinery, automobiles, IT,
construction, steel, base metals and chemicals, all industries where non-state enterprises are
also active. Reform and restructuring was encouraged to enhance competitiveness; ownership
was to be diversified through shareholding or attracting strategic investors; and the number of
central SOEs (161 at the time) was to be reduced.
The sizes and economic contributions of SOEs and state-invested firms are difficult to estimate
because of lack of reporting and the wide range of ownership forms. Enterprise ownership is
highly elastic in China, but use of the term “private enterprise” now applies to privately owned
unlisted companies, publicly listed companies, collectively owned companies, co-operatives,
jointly owned companies (including those co-owned by foreign investors) and selfemployment.
Such enterprises are dominant in IT and e-commerce, telecommunications
equipment, real estate and, to a lesser extent, energy and autos. By this definition, private
enterprises accounted for 60 per cent of fixed-asset investment in 2011 and 75 per cent of
employment.8 They include very large telecommunications-equipment companies, such as
Huawei (unlisted) and ZTE (publicly listed); IT companies, such as Alibaba, Tencent, Sina and
Baidu; real estate companies, such as Dalian Wanda, China Vanke, Evergrande Group and
Country Garden; and a few auto companies, such as Geely.
SOE shares of industrial assets, output and employment are steadily declining [Figure 3]. By
2011, their absolute numbers had shrunk to less than five per cent of total industrial enterprises.
Their shrinking share of industrial output (to 12 per cent) and employment (10 per cent)
relative to their share of total assets (to 20 per cent) reflects the capital intensity of their
operations. Even so, many are large conglomerates with numerous affiliates expected to carry
out a range of economic and social functions. They continue to be prominent in China’s
international transactions, particularly direct investment. In 2008–09, SOEs accounted for
nearly 70 per cent of China’s stock of outward investment, but only 15 per cent of the projects.
By far the largest number of projects (more than half of the total) was accounted for by private
companies, although the transactions tended to be small in size, accounting for only 21 per cent
of the total stock of outward FDI.9 An industrial breakdown of outward investment does not
distinguish ownership but indicates that, on average during the 2008–10 period, the service
sectors dominated China’s outflows, with primary-sector investment coming second, mainly in
minerals and energy. This pattern differs from world averages where — while services
dominate across the board — manufacturing industries are much more prominent as outward investors than is the case in China, which has been a major recipient of inflows (Table 1). The
Chinese industries that had accumulated the largest stocks abroad were mainly in services
(leasing and business services, banking, and wholesale/retail trade) as well as mining,
including oil and gas.
Many SOEs have retreated from labour-intensive industries and most are now focused in
strategic industries defined as central to national security or business competitiveness. Others,
such as the three petroleum SOEs — CNOOC, China National Petroleum Corporation (CNPC)
and Sinopec — have affiliates listed on international stock exchanges and aim to become
globally diversified players. Government ownership stakes in such companies as Lenovo and
Haier are less prominent and those companies operate more independently in international
markets. But they are favoured companies with political and personal ties at home, where they
face increasing competition from private enterprises and foreign firms; similarly competition is
growing in strategic sectors such as telecommunications services.
SOE GOVERNANCE IN CHINA
SOEs are expected to carry out the government’s strategic goals. Although SASAC has improved
the competitiveness and efficiency of many SOEs, their financial performance can be undermined
by requirements to deliver public services and charge regulated prices for their products. An
estimated one-quarter are loss-making,10 but many others have become profitable and, by some
reports, more efficient. In 2010, SOE profits were estimated to be five per cent of GDP.11
SOE governance is opaque, but as Downs12 has pointed out, “ownership does not equal
control.” Central-government SOEs are supervised and managed by SASAC; the party’s
Central Organization Department appoints and evaluates the performances of CEOs on
political as well as commercial criteria, of which return on investment is likely to rank near the
top of the list, along with profitability and market share.13 Heads of the largest SOEs have
ministerial rankings giving them status equal to the minister of commerce.
The national oil companies (NOCs) are directed to contribute to energy security. But they must
also respond to compelling commercial factors. As global latecomers they must replace and
diversify their reserves in competition with other NOCs and the multinational corporations;
they have also had to compensate for domestic pricing favouring consumers, which has caused
them to lose money in downstream operations (pricing is now moving toward marketdetermined
levels). At the same time, they seek to become internationally competitive and
world-class companies.14
In the case of CNOOC, the parent owns 64 per cent of the equity in its affiliate CNOOC Ltd.,
while 36 per cent is publicly held through listings on the Hong Kong and New York stock
exchanges. CNOOC Ltd., the world’s largest energy explorer by market value, acquired Nexen,
a troubled Canadian oil and gas producer with significant international assets. Standard
corporate information on this affiliate is transparently available through routine required
disclosures. It follows standard practices in corporate governance and transparency, with
internationally known non-Chinese citizens serving as independent non-executive directors; it
has a standard committee structure populated with independent individuals, and transparent
financial and corporate-social-responsibility disclosures.
Are this affiliate’s business decisions made by SASAC or the Chinese government on political
grounds? Available evidence suggests that the answer is no, for several reasons. First, as a
publicly listed company there are many other stakeholders besides government, including
investors, employees and regulators. Second, it is in the company’s interests to observe
regulatory requirements that emphasize the transparency needed to promote trust between
issuer and investors. Third, the independent directors are also responsible for the transparency
and accuracy of investor disclosure. Regulatory disclosures confirm this responsibility. In
short, CNOOC Ltd.’s incentive structure encourages good corporate citizenship. Even so, it is
difficult for outsiders to disentangle in any definitive way the political and commercial factors
in SOE investor decisions.
The Changing Policy Regime
With the recent top leadership changes in China, further SOE restructuring is in the works, but
is a sensitive political topic. Policy change is more likely to be done by stealth than by explicit
action. The SOEs’ home operating environment will change in ways that force them to become
more efficient. Key input prices are being deregulated, led by interest rates and the cost of
capital; more sectors are being opened to competition from non-state enterprises, as has already
happened in railroads and health care. Dividend payments will be raised, cutting into their
retained earnings. Recent high-profile corruption investigations in the pharmaceutical,
petrochemical and telecom sectors add further pressures for reform.15
In 2012 a controversial marker was laid down in China 2030: Building a Modern, Harmonious
and Creative Society, a study endorsed by Premier Li Keqiang and prepared by the World Bank
and the State Council’s think tank, the Development Research Center. This study defines two
relevant policy goals: to use state resources more efficiently; and to modernize the state’s
governance of SOEs, advocating that government’s role in production should be one that
produces only public goods.16 It also emphasizes that government’s appropriate role is to
provide public goods and services “which result in unremunerated positive externalities” such
as defence, infrastructure, social protection and basic R&D.17
Existing practices have involved multiple layers of government, often working at cross purposes
and producing outcomes the opposite of what was intended. State interventions have covered a
wide range of actions, from administrative approvals and inspection to industrial policy
restrictions, which undermine market forces in allocating resources. These discretionary actions
also cause rent-seeking, increase the uncertainty of the business environment and maintain
business dependence on government. Evidence that governments still own retailing and
restaurant establishments, hardly public goods, underlines the case for further rationalization of
government ownership.18 Strengthening the anti-monopoly law, adopted in 2008, would help as
well, particularly with respect to enforcement, which is currently voluntary.
The second challenge is to separate government ownership from management, introduce
modern corporate governance into SOEs and eventually divest government holdings to (state)
asset-management companies subject to stringent rules of transparency.19 If SASAC’s mandate
were revised according to this principle it would become the regulator and supervisor of
industrial SOEs rather than the owner. The scope for producing public goods remains
significant, mainly in social projects such as public housing and in providing reliable electricity
supplies and communication channels. Modern corporate practices are gradually being
introduced, as noted earlier, separating boards and senior-management roles from party roles in
the enterprise. Accounting and external-audit practices are gradually becoming more
independent and transparent.
Nevertheless, ownership practices still have a long way to go. If government ownership stakes
were to be transferred to professional state asset-management companies, the asset managers
should gradually diversify the portfolios over time and transfer dividend payments to the
treasury,20 since there is wide support for allocating some SOE profits to social spending.
As long ago as 2007, a dividend policy was approved, setting a sliding scale by the size of
enterprise. Initially the rates were phased in and set too low, but they have recently been raised
and the net has been widened to include more SOEs. Current reports indicate such changes are
being debated, but there is significant pushback from such large, profitable and politically
connected entities where incumbents would lose their privileged positions.
OUTWARD FDI: CHINESE BUSINESSES INVESTING ABROAD
Central-government SOEs are prominent players in Chinese outward investment. A ranking of
the top 30 non-financial investing firms puts the petroleum SOEs at the top of the list, followed
by a wide variety from other industries, some of which are non-SOEs (Table 3). A longer list
would include some well-known brands such as Huawei and ZTE, but not Lenovo (computers)
and Haier (consumer appliances), which are also brands that are well known outside of China.
The Industrial and Commercial Bank of China (ICBC) and China Construction Bank, which
rank first and second on the Forbes Global 2000 list in 2013, are of course not included here.
The China Entrepreneur Research Institute estimates that, in the first half of 2012 alone, 2,407
enterprises expanded their businesses in 117 countries with merger and acquisitions worth $30
billion.21 The Vale Center at Columbia University’s estimates of the number of companies
invested abroad in 2010 show that 12,000 parent companies had invested in 34,000 affiliates.22
As noted earlier, SOEs accounted for the largest share by far — 69 per cent — of China’s stock
of outward investment. By industry, 77 per cent of the outward flow of transactions were in the
services industries, particularly in business services, finance and trade; only five per cent were
in manufacturing, while 18 per cent were in mining and petroleum.23 Much of the activity up to
now has been mergers with and acquisitions of existing businesses rather than “greenfield”
investments in new capacity. As also noted earlier, privately owned enterprises have recently
joined the fray, with Shuanghui International Holdings’ $4.7-billion bid for Smithfield Foods
Ltd. (approved by CFIUS — the Committee on Foreign Investment in the United States)
representing the largest Chinese investment in U.S. assets to date. Other examples include
Dalian Wanda Group’s $2.6-billion acquisition of AMC Entertainment Holdings Inc., the
world’s second-largest theater chain, Haier Group’s $700-million bid for Fisher & Paykel
Appliances Holdings Ltd. of New Zealand and Wanxiang Group’s $26-million acquisition of
the assets of A 123 Inc., the insolvent American car-battery maker.24
Chinese enterprises have both advantages and disadvantages in investing abroad. Among the
advantages are active government-policy encouragement and support to “go out” as a result of
decisions in 2006 to build SOEs into national champions. Entrepreneurial (non-SOE)
enterprises have since been included in the policy. They are encouraged to access the natural
resources required to feed China’s industries, enter new markets, and acquire brands and
foreign technology. A second advantage is that the global downturn since 2008 created unique
opportunities to acquire distressed assets at reasonable prices. Third, SOEs have healthy
balance sheets due to their oligopolistic positions in home markets; they have had to pay
minimal dividends to the state; they have also benefited from subsidized input prices for
energy, land and use of the environment.
As indicated earlier, these advantages are now being phased out. At the time of CNOOC’s
controversial 2005 bid for Unocal, studies by both the Brookings Institution and the Peterson
Institute for International Economics concluded that SOEs did not have access to subsidies that
would be actionable under the WTO. While many argue that China’s SOEs access low-cost
preferred financing, Cornish25 and others argue that, as in OECD economies, large enterprises
are often banks’ highest-quality credits and are able to borrow at lower rates than riskier
customers. So are their competitors in international transactions. SOEs’ bank loans are
commercial decisions by the banks, both Chinese and foreign-owned. The fact that smaller
non-state enterprises may be charged higher interest rates should be seen as a reflection of the
still-immature risk-management capabilities of Chinese banks.
Chinese enterprises also face a number of disadvantages when investing abroad. First, they are
inexperienced latecomers; many of the world’s most desirable assets and locations have already
been taken by experienced investors from more advanced economies. Second, while many of
the SOEs are huge oligopolies or monopolies in the home market, with close ties to their
government owners and regulators and little domestic competition, they have little experience
with market-based international business practices and global rules of the road. Lack of such
knowledge can erode the profitability of a transaction when inexperienced managers overpay
for an asset or misinterpret or fail to take local business conditions and regulatory
environments into account in their operations. Third, rightly or wrongly, Chinese SOEs have
gained reputations for failing to apply market principles in their strategic and operational
decisions. This perception problem matters for at least two reasons. One is the importance of
market principles to the realization of benefits to the host economy. The second reason is that
such perceptions undermine the trust and transparency that are fundamental building blocks of
efficient markets. Both imply that Chinese SOEs need to overcompensate with efforts to
develop “brand” for commercially oriented decision-making.
Perceptions about political rather than commercial decision-making underlie national security
concerns, which are a particular worry in advanced countries receiving large shares of Chinese
outward investment. SOEs acting as agents of the Chinese government will undermine national
sovereignty of the host country. Such concerns are magnified by China’s opaque political
system and the 2006 decision to expand the roles of SOEs in sectors considered critical to
China’s national and economic security. Another concern is over investors’ willingness to abide
by host countries’ regulatory regimes, one that has been amplified by recent reports of cyberattacks
on government and enterprise networks traced back to the Chinese military. I return to
these issues below.
National security concerns aside, there is plenty of evidence to support the contention that
while Chinese investing enterprises have commercial objectives similar to those of other
multinationals, they are on steep learning curves in understanding and abiding by rules of the
road in international business and host country regulatory regimes. Evidence of learning can be
found in a survey of nearly 20 Chinese overseas investments, which showed that while early
investments in natural resources may have been intended to direct supplies to the home market,
the majority of recent investments aim to expand global supplies in response to world market
prices.27 The opaque governance of the Chinese parents of affiliates investing abroad is a
problem and reports of aggressive hacking into the systems of western companies do not help.
As Chinese enterprises gain more international experience and profile, however, it is likely that
market pressures and pressures from informed and vigilant national regulators will encourage
greater transparency and alignment with best international practice.
Taking these concerns together, the increasingly intense regulatory scrutiny suggests extra
efforts are needed by Chinese investors to demonstrate their intention to meet host country
concerns. Enterprises in technologically sensitive businesses such as telecommunications face
particularly intense scrutiny in the United States and United Kingdom. Besides CIFIUS
scrutiny, companies such as Huawei and ZTE have been studied by the U.S. House Committee
on Intelligence, whose chair released a critical report in late 2012 alleging that those companies
were complicit in bribery and corruption, and requested an FBI investigation.28 Chinese media
and regulatory pressures on Apple’s Chinese operations in April 2013 suggested tit-for-tat
behaviour, which adds to unease.
CHINESE ENTERPRISES INVESTING IN CANADA
Large-scale Chinese investment in Canada is a relatively recent phenomenon and, according to
Canadian statistics, accounted for less than two per cent of the total inward stock in 2012.
Historically, of course, American investment accounts for the dominant share of Canada’s FDI
stock, but that has declined in relative terms from 61 per cent of the total in 2000 to 51 per cent
in 2012. The U.S. is followed by Japan and, since 2004, Brazil whose shares are both less than
three per cent (Figure 4). The Heritage Foundation’s Investment Tracker, which measures
transactions over $100 million, reports that Australia ranks as China’s top destination for
transactions recorded between Jan. 1, 2005 and June 30, 2013, with Canada ranked third after
the United States and Australia. By the end of that period, Chinese inflows to Australia totalled
US$59.2 billion, followed closely by the United States (US$57.8 billion), Canada (US$37.6
billion), Brazil (US$28.2 billion) and Indonesia (US$25.8 billion). The sectoral breakdown of
China’s global investments is dominated by energy and power, accounting for nearly half (47
per cent) of the total, followed by metals at 23 per cent and finance at less than 10 per cent.29
Statistical information on the sectoral breakdown of Chinese investments in Canada is limited
to what can be gleaned from public sources. As in Australia, natural-resource sectors have
attracted a large number of relatively large investments, mainly by SOEs (Table 4), mostly in
western Canada. A number of transactions through intermediaries and tax havens are not
included in the official statistics. Nor are investments in which the Chinese entity acquires an
equity stake of less than 10 per cent. Historically, some large investments, such as Sinopec’s
2009 investment in the Northern Lights Project, CNOOC Ltd.’s 2011 acquisition of insolvent
OPTI and CIC’s 2009 investment in Teck Resources, have been uncontroversial, as was
Sinopec’s 2009 acquisition of a nine per cent share of Syncrude (which was similar in size to
the Shuanghui-Smithfield transaction in the United States).
China Minmetals’ 2004 bid for publicly traded Noranda, Canada’s largest mining firm and a
major zinc and copper producer, was more troubled. Despite the endorsement of the bid by
Noranda’s largest shareholder, it drew a storm of controversy about a “government proposing
to run a mining firm” and criticism of Canadian firms for having failed to bid first. Minmetals
withdrew its bid in 2005 when Noranda did a stock swap with its Falconbridge subsidiary that
raised the potential deal price closer to full value. In 2006, Falconbridge was acquired by the
Anglo-Swiss mining giant Xstrata.
Since 2008, a variety of smaller transactions have occurred, including greenfield investments,
by private and state firms in manufacturing, transportation and telecommunications, but most
acquisitions have been concentrated in natural-resource sectors. This pattern can be compared
with official statistics up to 2012 on the sectoral patterns of total foreign investment as reported
by national sources in Canada, the United States and Australia (Table 5). In Canada,
investments reported in natural resources and petroleum were slightly smaller than those in
“management of companies and enterprises,” trailed by finance. Both sectors saw growth at
similar rates of 13 per cent over the period. In the United States, manufacturing, retail trade
and finance dominate the picture, while in Australia, mineral exploration and development and
“real estate” dominate inflows (similar stock data were not available) followed by
manufacturing and services. These differences should not be a surprise as they reflect each
country’s comparative advantage.
CANADIAN POLICY AND REGULATION
The advantages that FDI offers host countries include portfolio diversification using foreign
capital, access to the technologies and international supply chains of foreign firms, and
increased domestic competition from them — all factors that contribute to faster growth and
more efficient use of resources. If that were all there were to it, there would be few constraints
on commercial decisions.
Many argue that it is in the national interest to seek foreign capital to develop Alberta’s oilsands.
The Canadian Energy Research Institute (CERI) has estimated that more than $100 billion will
be required for oilsands investments in the 2004–19 period.30 This is on top of the $40-billion
overall investment in oil and gas extraction in the 2007–11 period and the $9 billion in mining.
As Grant points out, these investments were largely funded by Canadian savings and heavily
expose domestic portfolios as a result. Foreign funding can diversify these risks.
Weighed against these benefits of inward FDI are three main policy concerns about Chinese
investment: enterprise ownership, asymmetric access for Canadian firms to the Chinese market
and national security concerns. Several other more implicit concerns include lack of trust,
foreignness and concerns about unfair competition. All of these concerns have been analyzed
carefully in Bergevin and Schwanen, Cornish, Grant, Moran, and Assaf and McGillis31 and are
summarized here.
Ownership
Ownership is an important issue in a number of countries including Canada. Concerns about
politically driven decisions need checks against actual behaviour. The behaviour of China’s
largest enterprises (mostly SOEs, so far) is largely consistent with that of multinationals
seeking to access new markets, natural resources and the acquisition of technologies and
brands. It is important to realize that the policy environment at home is changing; home
markets are increasingly competitive — ones in which they must compete successfully or die
— which can mean that foreign operations are the only way to expand their businesses. Indeed,
as China’s growth slows in the years ahead, China’s large enterprises are even more likely to
pursue additional offshore markets.
Cornish32 has argued, and as the earlier description of CNOOC Ltd. illustrates, SOE boards and
management focus exclusively on the company’s interests; to serve those interests they must
conform to stock-exchange and host-country rules and regulations. Market pressures on buyerseller
relationships provide a more cogent interpretation of their behaviour. At the same time,
as new arrivals in international markets, managers are still learning the rules of the road, which
differ radically from those in the close (but evolving) business-government relationships at
home. In its quest for Nexen, CNOOC Ltd. invested heavily in the approval process,
committing to allocate half of the board and management positions to Canadians, invest in
Nexen’s assets, make Calgary the headquarters for CNOOC operations in Central and North
America, run the company by commercial principles, and maintain Nexen’s high profile for
corporate social responsibility. Hill & Knowlton managed the public face of the transaction and
the demonstration of the company’s ability to meet the net-benefit test. Nexen shareholders
overwhelmingly approved the proposal and CFIUS cleared the transaction involving U.S.
assets, albeit with restrictions on assets in the Gulf of Mexico, whose details are not publicly
available.
31
It is worth noting that available information on the terms of financing for the $15.1-billion cash
offer for Nexen indicate a consortium of five Chinese and 15 international banks (including
BMO and Scotiabank) provided $6-billion bridge loans at the rate of LIBOR plus 80 points,
and up-front fees of 25 basis points. While the full funding profile had not been publicly
disclosed at the time of writing, it is expected that it will closely resemble the package
assembled for the earlier Unocal bid but with less financing from the parent.33
Asymmetry in Market Access
Asymmetry in market access is an issue in many countries. Framing it as a problem of
reciprocity, as has happened in Canada, is misleading as the latter term refers to an attribute of
much broader trade negotiations based on comparative advantage. The real concern is that
access for Canadian firms to China’s market should be equivalent to what is offered Chinese
firms entering Canada. This is a reasonable general principle, but China is still building its
institutions to regulate FDI — and the two countries have different sources of comparative
advantage.
National Security
The third issue is national security. Most countries screen foreign investments for risks to
national security, but the interpretations and tests are highly variable and have varying degrees
of opacity. The U.S. regime carried out by CFIUS is relatively transparent with consideration
of seven identifiable factors.34 Canada’s regime is relatively opaque reflecting a variety of
views. There are some conflicting corporate views where some see ownership of naturalresource
enterprises as a strategic issue while others argue that foreign investments in natural
resources, where Canada remains the ultimate owner, do not pose a strategic threat. Moran35
proposes three national security issues for which investment screening makes sense: market
dominance of supply that penalizes the host country; transferring technology that harms hostcountry
interests; or engaging in sabotage or espionage. These are serious concerns. Is
restricting investment the most effective way to address them? This is a blunt instrument that
denies Canadians access to foreign capital and international supply chains. Canadian regulators
should be enforcing our own regimes for oversight of safety, environment, labour laws and
financial transparency and soundness. The Office of the Superintendent of Financial
Institutions (OFSI), for example, closely supervises all banks operating in Canada, including
the Chinese-owned Schedule 2 banks. Canada’s natural resources are owned by the provinces
and provincial governments oversee the leasing, licensing and royalty regimes for such
resources. These resources cannot be moved abroad without official permission. Our rules and
regulations, and their enforcement, should reflect our national interests.
As to concerns that SOEs and their affiliates take orders from government owners to tie up
supplies for their own use, Moran36 has documented an evolution in the behaviour of naturalresource-seeking
SOEs from that of seeking to secure supplies for Chinese use (as Japanese
investors sought to do in the 1970s and ’80s) to investing in production for international
markets. It should also be recalled that Industry Canada requires SOEs to operate on a
commercial basis. Nor is there any transport infrastructure available to export significant
quantities of oil and gas to Asia. Even if there were, exports would have to satisfy the National
Energy Board’s net surplus tests.
FUTURE TRENDS AND THEIR IMPLICATIONS FOR CANADIAN POLICY
Re-evaluating the Existing Regime
Canada is a country in need of international capital to fully realize its comparative advantage
based on abundant natural resources. China is a major potential source of capital from both
private and state enterprises. The Canadian government’s December 2012 policy statement,
added to the existing opaque net-benefits and national-security tests, has raised the risks in
several ways that the development of the oilsands resource will be underfunded.37 First, the
policy increases the cost of capital and reduces potential investor interest by increasing the
uncertainties about approval of the transaction. A related issue is that the net-benefits test raises
transactions costs relative to alternative locations in countries with more transparent processes
and less uncertainty. It is impossible to value proposals that are withdrawn before the approval
process — and Industry Canada does not publish statistics on proposals that are withdrawn
during the approval process. Second, the size restrictions introduced in December 2012 will
discourage private-equity investors for whom exit strategies are a key dimension of their highrisk
investment decisions. Large players provide potential exit channels and if they decline in
number so will the potential value of such investments. Those firms likely to suffer most from
reduced funding, paradoxically, will be emerging players whose viability and pace of
development could be undermined by perceptions among potential investors of “political
whim” in Canada. Third, restrictions on investments by large firms reduce market discipline
and the threat of takeover for Canadian-owned enterprises by shielding them from potential
takeovers that are attracted by poor managerial performance.
Canada’s ambiguous net-benefits test and national security review process are also vulnerable
to politicization. Both put the onus of proof on the investor rather than on the reviewing
minister. While vagueness and uncertainty may increase the leverage of Canadian authorities, it
reduces foreign investment and leaves open the possibility of politicized decisions that protect
Canadian firms from foreign competition. Comparison with the Australian regime shows
striking differences in the threshold for reviews, the transparency of the tests applied (Australia
provides a transparent list of the factors it takes into account), the transparency of the
minister’s decision (the Australian minister provides a transparent public explanation), and
accountability (the onus is on the Australian government to explain why it will not allow a
transaction).38 In contrast, Canada’s screening applies to all new FDI, its net benefit test is
subjective, opaque and interventionist; reasons for decision are not necessarily made public and
the onus is on the investor to show net benefits.
There are key implications for policy, as Bergevin and Schwanen, Cornish, Grant, Moran and
Assaf and McGillis have argued. Canada should revise its review regime in a number of ways:
the economic and national security tests should be clearer about the factors under review (such
as Moran’s three national security threats); SOE guidelines should clarify performance
expectations; and the onus should shift to the federal government to show why the investment
does not satisfy the national interest, further adding to transparency.
The policy emphasis on ownership means that Canadians have failed to make use of other
policy tools. More emphasis on behaviour would mean taking more responsibility for the
knowledge and skills of Canadian regulators. Canada has well-established regulatory regimes
ranging from competition policy to regulation of firm behaviour with respect to financial
soundness, labour laws and worker safety, and environmental protection. It may be that
Canadian regulators need to increase their understanding of the business and policy
environments of the home countries of firms investing in Canada, including SOEs from China,
but also firms from Brazil, India, Russia and even Mexico. With more expertise, regulators
could improve their capabilities to monitor foreign-firm behaviour and any undertakings they
may have provided to Industry Canada. Canadian educational institutions should offer training
programs on these regulatory regimes to foreign executives — activities that are well
established in some U.S. business and technical schools. As well, Canadian officials should be
working with foreign officials to identify each government’s expectations of foreign-firm
behaviour and to evaluate how such firms are treated. In the case of China, such activity could
build directly on the China-Canada Complementarities Study completed by officials and
published in 2012.
Re-evaluating Canadian Policy Assumptions
The other key policy issue is Canadian assumptions about Chinese enterprises. Such
assumptions are becoming dated as China’s policy regimes evolve. Three main changes are
underway as China’s new leaders push economic reforms leading to eventual opening of
China’s capital account. First, the FDI regime is changing. Not only is the old restrictive FDI
regime inconsistent with the new growth model, particularly in services and high-tech
manufacturing, but competition resulting from a more liberal regime will create pressures on the large state monopolies in energy and finance. Second, China has now built the institutions
needed to regulate inward FDI, having adopted a competition policy, a negative list approach
(in which everything beyond a designated list of exceptions is allowed), and an FDI screening
body aimed at national security concerns. Third, foreign concerns about asymmetric market
access now matter to Chinese enterprises which have more to lose in their efforts to fulfill
ambitions abroad than by a continuation of the current restrictive and internally inconsistent
approaches at home.39 The decisions to proceed with the stalled negotiation of a China-U.S.
bilateral investment treaty (BIT) and an experiment to liberalize existing FDI rules as part of
the Shanghai Pilot Free Trade Zone will push things along.
As noted earlier, Chinese outward FDI (OFDI) will increase inexorably in the years ahead. If
the current six per cent outward-FDI stock relative to China’s GDP40 were to be maintained for
the rest of this decade, by 2020 — when China’s GDP will have doubled to around $14 trillion
according to projections by Goldman Sachs — the outward-FDI stock could be $700 billion,
which would be similar to stocks accumulated over much longer periods by Canada and Japan.
More bullish estimates put GDP in 2020 at $20 trillion and the OFDI stock at least $1 trillion,
possibly $2 trillion,41 which would still be one-quarter to one-half the U.S. total today.
In Canada, the Chinese OFDI stock measured by Statistics Canada more than doubled between
2008 and 2012, from $5.6 billion to $12 billion,42 increasing Canada’s share of China’s total
OFDI to more than two per cent. Note that this happened at a time when the shares of the other
major investing countries in Figure 4 were static or declining. The stock in Canada will at least
double again in 2013 with the inclusion of the CNOOC-Nexen transaction, to nearly five per cent
of the total. Even if Canada’s share continued at two per cent to 2020, it would total $40 billion
— or about 40 per cent of what CERI has estimated to be the financing needs for the period.
Chinese firms are on a learning curve, not only with respect to reforms in markets and
corporate governance at home, but with respect to the regimes governing international business
in host countries such as Canada. In response, the federal government should build upon its
recent China-Canada Complementarities Study, in which officials from both countries worked
together on seven sectors where both sides have interests and growth opportunities, to identify
complementarities as well as issues that need to be addressed. For example, in natural
resources, the study recognized that:
“To take advantage of complementarities in this sector, further
improvements could be made in the clarity, efficiency and predictability of
inward investment-related regulations, the compatibility of certification
systems and the expediency of approval process on goods such as
equipment.”43
Officials from both countries should continue to meet periodically for mutual discussions that
follow up on such issues.
Or will Ottawa reject Chinese suitors? Increasingly they will come in the form of non-SOE
investors seeking to add Canadian assets to their supply chains, to acquire technology and
expand markets using Canada as a base for North America or the Western Hemisphere. Such
transactions could be very much in the national interest and are trends that should be
encouraged.
Yet Canada continues to send mixed messages, placing obstacles in the path of SOE investors
through the exceptional-circumstances test introduced in December 2012, while deepening the
two-way economic relationship with the signing of the Foreign Investment Promotion and
Protection Agreement (FIPA) in September 2012 that provides investors in both countries
more assurance about the future safety of their assets.44 Building on the China-Canada
Complementarities Study would be a wise investment in better understanding each
government’s objectives, encouraging high standards of corporate governance and interpreting
policy and institutional differences to find mutually acceptable solutions.
Canada needs a simpler, more transparent policy framework that focuses mainly on national
security issues. It should be transparent and focus on investor behaviour rather than ownership
through competent and well-informed regulatory oversight. The basic issue with China is one
of bridging differences between economic systems, a process that should be guided by the
principle of mutual learning. The end goal should be to improve competitiveness and
contribute to the development of both sending and receiving countries.
* About the Author
Wendy Dobson is a professor at the Rotman School of Management and Co-director of the Rotman Institute for
International Business. She is a former Associate Deputy Minister of Finance in the Canadian government and a
former President of the C.D. Howe Institute, Canada’s leading independent economic think tank and a nonexecutive
director of Canadian companies in finance and energy. She is also a director of the Canadian Ditchley
Foundation, Senior Fellow at Massey College and member of the Advisory Committee of the Peterson Institute of
International Economics. She chairs the Pacific Trade and Development Network (PAFTAD).
She has written extensively on the banking and financial systems of China and India. Her writings Gravity Shift; Will
the Renminbi Become a World Currency?; The Contradiction in China’s Banking Reforms; Financial Reforms in
India and China: A Comparative Analysis; and her newly released publication Partners and Rivals: The Uneasy
Future of China’s Relationship with the United States.
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