China Inc. Comes to Canada

July 17, 2009

The single biggest investment by a Chinese entity in a Canadian company was concluded on July 15 when China Investment Corporation (CIC) finalized its purchase of a C$1.7 billion equity stake in Teck Resources of Vancouver. A few weeks earlier, the world’s largest bank – Industrial and Commercial Bank of China – established a presence in Canada with the acquisition of the Bank of East Asia (Canada). These deals are important landmarks in Canada-China economic relations that could point the way to improvement in the broader diplomatic and political relationship.

It was a coup for Teck to secure CIC’s investment for 17% of the company in Class B shares, with a guaranteed lock-in period of 12 months. The deal not only brought in much needed cash for the debt-laden company, but also a formidable partner with impeccable connections in the very markets that will drive demand for Teck’s production of metallurgical coal and other minerals. This deal alone has quadrupled the stock of Chinese foreign direct investment in Canada.

The bigger story, however, is that the investment sailed through without as much as a hiccup. It appears Industry Canada did not deem it necessary to review the transaction under the Investment Canada Act (ICA). Indeed, the financial arrangements of this private placement do not trigger any alarm bells and would not have supported a review. But the Act has been adjusted recently to single out investments by foreign state-owned companies and to take into account “national security” considerations.

As the flagship sovereign wealth fund of the People’s Republic of China, CIC could have fallen under the new criteria. A review would have opened up an unproductive and ultimately futile debate about whether CIC had a “commercial orientation”. The Foundation has previously raised concerns about the ambiguous nature of the ICA guidelines on state-owned enterprises (see State Capitalism: Do We Need Controls? ). It comes as a relief that officials have resisted any temptation to open a Pandora’s box based on an ill-designed measure.

Since the debacle of China Minmetals’ failed bid for Noranda in 2005, there has been a suspicion among China watchers in Canada and Canada watchers in China that Ottawa is not keen on Chinese inward investment. The ICA guidelines strengthened this impression, but there has not been a big test of Chinese investment in Canada until the Teck deal. That the deal has closed without regulatory interference and with no public outcry should be seen as a clear signal that Canada is open to Chinese investment.

It is also high time to revise the widely-held perception that Chinese enterprises are not interested in Canadian investments. The Asia Pacific Foundation of Canada’s survey of over 1,100 Chinese enterprises found a high degree of favour for Canada as an investment destination. Indeed, Canada was ranked second only to the United States, ahead of Australia, the UK and other Western industrialized countries. When asked about perceived barriers to investing in Canada, Chinese enterprises did not consider “negative reactions from the Canadian government and public” to be a major factor.

CIC’s seemingly effortless transaction of a major deal in Canada stands in stark contrast to the difficulty faced by other Chinese firms that have recently tried to buy stakes in Australian mining companies. In early June, Rio Tinto, the Anglo-Australian mining giant, abandoned a proposed $19.5 billion deal with Aluminium Corp. of China, in part because of public opposition in Australia.

There is no cause for gloating since Canada is still behind Australia in attracting Chinese investment, but it will not have gone unnoticed in Beijing and Shanghai that two similar countries responded to the prospect of a major Chinese investment in very different ways, and that in this instance, Canada was the “friendlier” partner.

Indeed, the CIC-Teck deal has come at a critical time in Canada-China relations. After nearly three years of cool political ties between Ottawa and Beijing, the Conservative government is making a serious effort to repair the relationship. The visits to China earlier this year by Trade Minister Stockwell Day and Foreign Minister Lawrence Cannon were reciprocated two weeks ago by Chinese Foreign Minister Yang Jiechi. Transport Minister John Baird is in the People’s Republic this week, and the Prime Minister has confirmed that he will visit China – likely in the Fall.

To make a fresh start, he will need fresh ideas. Two-way investment should be a centerpiece for the next chapter in Canada-China relations, with the respective governments actively promoting and facilitating capital flows in both directions. In the post-crisis economic landscape, China will emerge as a major source of long-term capital, and not just a major destination. The CIC-Teck deal demonstrates that Canada can be at the nexus of these flows.

An edited version of this article appeared in the National Post on July 16, 2009.