China is Going Shopping. Is Canada Ready?

Author(s): Kenny Zhang

Published: 04 Novembre 2009  

Op-Ed

A recent ground-breaking survey by the Asia Pacific Foundation of Canada found that Canada is near the top of the list of overseas investment targets for Chinese companies. The „new China‟ is flexing its economic muscle and Chinese investors are prepared to buy their way into new markets and secure access to resources and technology. The question for this side of the Pacific is whether Canada is ready for a growing inflow of Chinese investment over the next few years?

The survey, which polled 1,104 Chinese companies, found five interesting insights that shed light on why it is crucial for Canada to be prepared.

Economic crisis may change the global FDI landscape

The survey took place a few months after the current economic crisis started in fall 2008. The result suggests that more than half of the respondent companies felt the negative impact of the current economic crisis on their outward investment decisions.

However, what the English-speaking people see as a crisis, Chinese see as “Weiji”, crisis and opportunity. About 40% of respondent companies indicate that they intend to increase overseas investments in the near future, either substantially or moderately. Companies that have already invested abroad are more likely to increase their overseas investment. Chinese outward investment is likely to rise over the next few years.

The newly released global FDI figures point to the trend that economic crisis may change the global FDI landscape. According to the UNCTAD‟s World Investment Report, the overall global outflows of FDI declined in 2008 by 13% to US$1.9 trillion from US$2.1 in 2007. It fell further by 46% for the first quarter of 2009 over the same period of 2008 for 79 countries (accounting for about 93% of global FDI outflows) for which such data were available.

Outflows of FDI from developed countries as a group declined by 17% in 2008, while such flows increased substantially to a record level in 2007. The financial crisis and the economic recession in many developed countries reduced the capacity of, and propensity for, TNCs to invest abroad in both 2008 and early 2009.

On the other hand, FDI outflows from developing countries rose by 3% in 2008, but began to decline in the first half of 2009. Asian economies, especially China, continued to dominate as FDI sources. The outward flows of FDI from China recorded 132% growth in 2008.

There is a growing consensus among many economists that China will continue dominate the global FDI transactions in the rest of 2009 and years to come.

Profit-seeking is likely the real motivation

The survey found that the top three drivers motivating Chinese company‟s overseas investment include, 1) following government‟s “go global” policy, 2) seeking new markets and 3) pursuing advanced technologies. Other business motivations include reducing production costs and taking advantage of preferential policies in host countries, obtaining a well-known product brand, overcoming trade barriers and accessing natural resources.

Of all motivations, Beijing‟s “Go Global” policy and related incentives remain a strong influence on Chinese outward investment. The “Go Global” policy is a strategy initiated and encouraged by the central government, and the aim of which is to establish a larger Chinese presence in the international business arena. The policy focuses on foreign acquisitions, brand-building and boosting international competitiveness.

Since then, an interesting trend has been emerging that China‟s going global appeared as “one policy, many players”. The most prominent player is the China Investment Corporation (CIC), a US$200 billion sovereign-wealth fund backed by over $2 trillion foreign exchange reserves with a mission to make long-term investment that maximizes financial returns for the benefits of its shareholder.

Established in September 2007, CIC diversified its investments strategically at home and abroad. It bought shares in the country‟s three largest banks, and owned 35.42% of Industrial & Commercial Bank of China, 57.09% of China Construction Bank and 67.53% of Bank of China. At the global markets, CIC invested in stakes of US$3 billion and US$5 billion in Blackstone and Morgan Stanley respectively, US$100 million in VISA, US$1.74 billion in Teck, a Canadian mining giant. Recently, CIC agreed to lend US$1.9 billion to Bumi of Indonesia, the world‟s largest exporter of thermal coal, to help refinance its existing debt.

Armed with a newly established International Advisory Council, of which Hon. David Emerson is the only Canadian member, CIC is more likely to diversify its investment across the industry sector, geography region, or asset class.

Another major player is a group of state-owned enterprise giants (SOEs), including China Minmetals which failed a C$6.7 billion bid of taking over Noranda in 2004; Wuhan Iron and Steel which invested US$240 million in Consolidated Thompson in 2009; and PetroChina which recently agreed to pay C$1.9 billion for a stake in Athabasca oil sands projects.

When these names, often associated with a title of SOE, appear on international business headlines, people may intend to overlook the fact that these companies are actually publicly owned. For instance, China Minmetal and Wuhan Iron and Steel are listed and traded at Shanghai Stock Exchange since 1997 and 1999 respectively, and PetroChina is multi-listed at Shanghai, Hong Kong and New York stock exchanges. As public companies, they have to follow the international business rules and to satisfy the interest of shareholders.

The emerging players are perhaps a group of non-SOEs, both large and small, which are eager to tag into the global markets for their business expansion. Participated in the APF survey, 80% are non-SOEs which show their enthusiasm about outward investment that is identical from their SOE counterparts.

Regardless which categories they belong to, all players seem to play for real return and profit while going global.

Canada has great potential

The survey found that Canada is in a unique position to attract potential Chinese investments, despite that only 7% of companies, which have invested overseas, reported that they have invested in Canada. There are 21% of those companies considering investment in Canada, and the likelihood increases to 75% if the companies have already had investment experience in Canada.

One of the key attractions of Canada is its openness to Chinese investment, especially compared with countries in Western Europe. The U.S., Canada and Australia rank highest in terms of perceived openness to Chinese OFDI. Companies that have invested overseas perceive higher openness across all destinations than do all respondent companies.

This may come as a surprise to people who believed the Harper Government‟s past tepid relations with Beijing were hurting Canada‟s business ties with China. However, the survey found that the likelihood that the Canadian government or public will react negatively to Chinese investment was not considered to be a major challenge for their investment in Canada.

Canada is also seen as a gateway to the U.S. and other key international markets. The priority market of Chinese outward investment is a determining factor in whether or not to invest in Canada. The majority of companies that have invested in Canada are looking to service the entire NAFTA market. Only 25% said their planned investment was to service the Canadian market alone.

Chinese companies see diversified investment opportunities beyond energy. The survey found that energy and natural resources were seen by all respondent companies as the most promising sectors for investment in Canada. However, companies that have already invested in Canada believe agri‐food, ICT, bio-tech are among the most promising sectors in Canada.

The beleaguered manufacturing sector of Ontario will find little encouragement in the study as the car industry and auto parts manufacturing are among the least attractive areas to Chinese investment.

Chinese investors face challenges in Canada

The survey found that among the biggest concerns Chinese firms have in considering investment in Canada is the worry consumers in Canada have about the quality and safety of Chinese products.

Although Chinese enterprises did not consider "negative reactions from the Canadian government and public" to be a major factor, they still have faced operational challenges, including: a lack of understanding of the legal and market risks in Canada; a lack of awareness and capacity in investment financing; and a lack of choice of efficient entry modes for investment.

The survey also found that Chinese investment has focused on manufacturing and trading sectors, followed by IT products and services, and resource extraction or processing, while various service sectors have been relatively neglected.

Establishing a branch operation is the most common entry mode for China‟s recent investment, while other effective entry modes, including M&A, have remain a lower priority.

The intention of using company‟s own capital as major source for overseas investment is likely limit the scale of investment. Unlike CIC or large SOEs, most SMEs are unlikely to make a bold move with lack of sufficient capital financing. That‟s why nearly two-thirds of companies experienced in foreign investment have outward foreign investment of less than US$5 million, as the survey found out.

All these challenges point to a business principle that applies to all Chinese investors: due diligence. Despite more efforts of improving the products‟ quality and safety, Chinese companies have to do their due diligence for their “Canada Strategy”, along with the “Going Global” strategy.

Canada has to be prepared

Canada has to be prepared because Global China is coming. This is not the China that has been filling Walmart‟s shelves with low-cost manufactured goods. This is the canny and self-confident China that has spent several billion dollars in the past few months alone buying into Teck Resources Ltd. and Athabasca Oil Sands Corp..

All levels of Canadian governments have to provide more transparent guideline for foreign investments in Canada. A message has to be clear for all foreign investors, especially the China‟s state-owned companies, that all firms who do business here have to play by Canadian rules. The principal for foreign investors is that its access to resources, export permits and where it funnels its profits are subject to the same controls as any investor in the sector.

Canadian professional services have many roles to play in assisting Chinese companies invest in Canada to produce fruitful results that benefit both countries. From legal advices, to financial and accounting services, Canadians can be partners, not enemies, with Chinese businesses at the global stages.

The survey report, China Goes Global 2009, was prepared by the Asia Pacific Foundation of Canada in partnership with The China Council for the Promotion of International Trade. The full report can be viewed at http://www.asiapacific.ca/en/survey/china-goes-global-2009

(Published at China Business, November 2009, Volume 11)