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 U.K. 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 centrepiece 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.
Yuen Pau Woo is president and CEO of the Asia Pacific Foundation of Canada, a Vancouver-based think-tank. This article was originally published in Canada’s Financial Post. The original can be found here.
The contrast between the Canadian and Australian governments’ approaches to Chinese investments reflects that Canada is more pragmatic, realistic and less protection and restrictions against Chinese investments. While Canberra may have thought it had done in its national interest, the costs and benefits of unduly and overly restrictive to Chinese investments remains to be seen. As in the case of international trade, many protectionists thought or think their protections would be beneficial to their protective countries, but economics has proven the otherwise.
The international economic structure has been experiencing a significant transformation and this trend is set to continue for the foreseeable future. Although a developing country, China has shown to become a large capital exporting country, largely as a combination of main two reasons: a very high rate of savings and a very rapid grow of a large economy. On the other hand, a number of industrialised countries have been or become capital importing countries mainly due to relatively low saving rates and relatively low costs of international capitals.
International capital flows, as international trade in goods and services, benefit both capital exporting and importing countries, by raising the returns to capital for exporting countries and lowering the costs of capital in importing countries in the first place, and by smoothing savings, consumption and investment of every country over time and contributing to welfare maximisation in each country beyond what is achievable in the absence of international capital flows.
Due to various reasons, there are restrictions and protections regarding international capital flows and cross border investments, just as in the case of trade in goods and services. Some restrictions may be justified, but most are reflection of special interest groups, poor understanding including the economics of it and self-inflicted fears.
As in the area of trade, there appears a need for an international or world organisation / institution where countries come together and agree on a set of well defined rules governing international capital flows. Such a need is becoming stronger and stronger as the magnitude of international capital flows expands and also the incidences of “protection” are increasing. Otherwise, there is a rising danger of investment protection.
“The contrast between the Canadian and Australian governments’ approaches to Chinese investments reflects that Canada is more pragmatic, realistic and less protection and restrictions against Chinese investments.”
I think that Australian governments and share holders have had previous experience with the Japanese buying mining companies and manipulating the price paid for resources.
This deal must have given a lot people a case of Déjà vu. I think Canada should approach this with caution national interests are at stake.