State-Owned Enterprise Investment in Canada: The Next Chapter

A new center of intellectual opposition to Chinese state-owned enterprise investment (SOE) has emerged in Canada and it is located in the very province that has received the overwhelming share of such deals.  The highly-regarded School of Public Policy (SPP) at the University of Calgary is developing a track record of scholarly publications and public presentations that argue for greater distrust of Chinese SOEs and stronger restrictions on their investments in Canada.

The latest is a report by SPP Research Fellow Chen Duanjie who provides the semblance of an intellectual case for the newly-articulated federal government policy of allowing Chinese SOE takeovers only in “exceptional” circumstances.  Her argument is based essentially on three propositions: a) that Chinese SOEs are unlike Canadian crown corporations; b) that they are agents of the Chinese government; and c) that they underperform private companies.

The comparison with Canadian crown corporations is irrelevant since no serious analyst believes Chinese SOEs are akin to say the CBC, and would advocate for policy development based on that (mis)understanding.  This argument is also bizarre – especially coming from a pro-market institute – because it suggests that a Canadian crown corporation looking to buy assets from the private sector would be perfectly acceptable.  I suspect that Dr. Chen and her colleagues at SPP would be as opposed to Canadian state involvement in the oil and gas sector as they are opposed to Chinese SOE investment, so why make the false comparison in the first place?

Dr. Chen goes into breathless detail about how SOEs are responsible to the Chinese government, but what is really so surprising about the fact that a state-owned enterprise is accountable to its main shareholder? 

A careful reading of her essay suggests that it is not the nature of accountability as such that Dr. Chen objects to, but it is the Chinese state itself, which she believes has a “distorted and often disreputable drive toward global hegemony”.  This is a serious accusation and one worthy of debate, but she provides no elaboration of the point or any sense of the complex issues around China’s growing involvement in the world and in global governance.

Other more detailed studies of SOEs in the oil and gas sector provide a more sophisticated and nuanced picture of state-company relations.  To start with, national oil companies already control around 80 percent of the proven oil reserves in the world.  To treat SOEs as exceptional is a serious misreading of the industry. In the Chinese case, it is well known that the three major national oil companies (CNPC, Sinopec, and CNOOC) compete fiercely against each other, despite being owned by the same parent.  Research has shown that the impetus to go abroad is about getting more freedom from Beijing’s control (hence to be more market-oriented) rather than part of a grand plan to promote Chinese hegemony.  The partial listing on international stock exchanges of the three big NOCs, as well as of other Chinese SOEs, should be seen in this context.

The third leg of Dr. Chen’s argument is that Chinese SOEs underperform private companies.  To establish her point, she compares individual Chinese state-owned firms with the average of the top ten non-Chinese, non-SOEs on the Fortune 500 list, excluding financial firms for the period 2009-2011.   Even if you accept that her comparison is fair, it is clear from the table that some Chinese SOEs (for example in mobile networks and resource trading) hold their own against the global top ten in their sector – which undermines the argument that SOEs are intrinsically underperformers. 

But these comparisons are in any case beside the main point of her paper, which is about the approval of foreign investment in Canada.  The logic of her argument would lead the government to take a view of future corporate performance in the assessment of a proposed SOE investment/takeover. If this is to be the case, why would Ottawa not also make judgments about the future performance of a private investor?  The law of averages ensures that there will always be companies that underperform their cohort – should we reject investment from all of these “below-average” companies, SOE and private alike?  In making financial performance a consideration for government approval of foreign investment, Dr Chen in effect contradicts her avowed preference for property rights (those of shareholders) and free markets.

Like many other papers and articles arguing against Chinese state-owned enterprise investment in Canada, Dr. Chen’s report is long on foreboding but short on specifics.  There can be no doubt of practices by SOEs in China and elsewhere that would not be acceptable in Canada, as there are examples of private sector malfeasance around the world.  But Dr. Chen and other SOE skeptics almost always neglect to consider the ways in which Canada can (and does) protect itself against the bad behavior of companies.  It may be the case that Canada is not tough enough when it come to say environmental laws, training of domestic workers, or labour codes, but the solution is simply to toughen those regulations, and to make them apply equally to domestic and foreign firms – private or state-owned. 

My sense is that most SOE skeptics are not oblivious to the role of domestic regulation, and that they downplay the role of regulation because their opposition to Chinese SOEs is more fundamental.  It is that they dislike the Chinese system of government (as Dr. Chen was quoted: “Basically, what I am saying is that I don’t trust them”) and see SOE investment in Canada as a form of backdoor nationalization of Canadian industry. 

There is much to dislike about the record of Chinese political and economic development since the founding of the People’s Republic in 1949, but it is unclear to me that blocking SOE investment in Canada will set Beijing on a better path (on the contrary, but that is for another article).  In any case, if one’s objection to the Chinese government is that it stands for the opposite of “our values”, it is pure hypocrisy to accept some kinds of economic interaction with China (exports and imports) but not investment.

I can sympathize with those in Alberta and elsewhere who – having fought the fight against Canadian state ownership and control of the oil and gas industry, and won – now see the investment of Chinese (and other SOEs) in the oil patch as a form of stealth nationalization.  This is, however, a mistaken view because no Canadian taxpayer funds are involved in a foreign SOE operating in Canada and, more importantly, there are no Canadian government preferences accorded to the foreign SOE, which has to operate within the market framework of the Canadian economy.  To the extent that Chinese SOEs receive preferences in their home country, that is for Chinese taxpayers to protest. 

To be fair, Dr. Chen’s conclusions only goes as far as the policy articulated by Ottawa at the time of the CNOOC-Nexen approval in December 2012 – that future takeovers by foreign SOEs should only be on an exceptional basis, and that SOEs in general will be given additional scrutiny under the Investment Canada Act.  However, the government has already gone beyond that policy statement by announcing in the recently-tabled Bill C-60 that an SOE would include an entity that is controlled or influenced by a government of a foreign state (whether federal, state or local), directly or indirectly. Given that China is a nominally socialist economy with a Leninist political system, this new ruling could potentially apply to most if not all Chinese companies. Even minority investments by SOEs (and by Canadian entities) could be subject to special review if the investors are deemed to be influenced by a foreign government.

I am not arguing that there should be no scrutiny of SOEs or that there is no possibility of actions taken by state-controlled companies that are inimical to Canadian interests. There may also be threshold effects to guard against, but we are far away from Chinese or any other SOEs controlling a given industry in Canada.  It is simply unclear to me that SOEs should be treated differently from private firms and that the introduction of a vague new standard around the “influence” of foreign governments is conducive the attraction of investment from China.  In any case, the Investment Canada Act already has a national security provision that can be used to block any foreign investment – private or state-owned.  It is curious that Ottawa would on the one hand trumpet the importance of the recently-concluded Canada-China Foreign Investment Promotion and Protection Agreement, and on the other hand put in place a policy that effectively discourages investment from China.  Six months after the groundbreaking approval of CNOOC’s takeover of Nexen, we are not much further ahead in our thinking about the role of SOE investment in the Canadian economy.

This piece was first published in iPolitics on June 12, 2013.