China’s State-Owned Enterprises and Canada’s FDI Policy

Résumé

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.