Reciprocity in Canada-China Trade and Investment
The US Congressional report warning of national security risks in telecommunications equipment supplied by Chinese IT giants Huawei Technologies and publically traded ZTE has reverberated loudly in Canada. Last week, Ottawa invoked a ‘national security exception’ that could exclude Huawei from helping to build Canada’s super secure data and telecommunications network. This is notwithstanding that Huawei is already providing high-speed networks for Bell Canada, Telus, SaskTel, and Wind Mobile.
The invocation comes at a time when the Harper government has just extended the Investment Canada Act (ICA) review by 30 days beyond the initial 45-day period for CNOOC’s $15.1 billion takeover of Calgary-based Nexen that can be extended again. The bid, overwhelmingly approved by Nexen shareholders, must be determined to be of ‘net benefit’ to Canada to be approved. Speaking to reporters in Dakar, Senegal last Saturday, Prime Minister Harper said Canada wants a growing relationship with China but Chinese investments had to be scrutinized for national security.
“The relationship with China is important. At the same time, it is complex. It’s complex because the Chinese obviously have very different systems than we do, economic and political systems, and that’s why obviously some of these particular transactions raise concerns. We will ensure as a government that we have not only a growing relationship with China but a relationship with China that is in Canada’s best interests”, he said.
Hysteria generated by the US report aside, the issue comes down to distrust among Canadians of Chinese SOEs, the opaqueness of the Chinese system, and the need for reciprocity in bilateral trade and investment. Yuen Pau Woo, CEO of the Asia Pacific Foundation, remarked, “There’s a strategic mistrust for China that comes from an economic and political system that is unfamiliar to Canadians and is, in some sense, undesirable. We don’t understand the opacity and we resist the opacity of the Chinese system.”
Many Chinese SOEs are not publically traded so information disclosure is limited and for those that are, information is released only as required by the legislation. CNOOC Group is fully owned by the Chinese government whose assets are overseen by the State-Owned Assets Supervision and Administration Commission ((SASAC) under the State Council. Its subsidiaries CNOOC Ltd and China Oilfield Services are listed on the Hong Kong exchange and on the Hong Kong and New York exchanges respectively. It is CNOOC Ltd that is bidding for Nexen.
Short of a major reform of the ICA and many ideas have been aired for clarification of Canadian objectives aimed at reducing ‘politicization’ of ICA reviews, the Harper government is looking at the CNOOC bid as a special case, eschewing a direct link between it and broader access to the Chinese economy. The Globe and Mail suggests that since the signing of the Canada-China investment protection agreement last February, the Canadian government is preoccupied with the detailed drafting of that treaty and its practical effectiveness. The government may also be focused on promoting trade following the recent release of the joint Canadian-Chinese “economic complementarities” report that was the subject of a series of previous posts.
At the same time, however, the Canadian government has been canvassing the need for reciprocity in Canada-China trade and investment. In February, Natural Resources Minister Joe Oliver said any long-term strategic relationship with China would have to be based on “mutual respect, reciprocity and equality”, without going into specifics. Before going to the APEC Summit in Vladivostok Prime Minister Harper said, “we want to see this economic relationship continue to expand, but we want to see it expand where it is a clear two-way flow and clear benefits for both sides.”
Speaking at a conference organized by the Canada-China Business Council (CCBC) in Beijing last November, John Manley, President and CEO of the Canadian Council of Chief Executives (CCCE) stated that Canadians (and other foreign investors) face a raft of restrictions in key sectors of the Chinese economy. In many industries, foreign firms can only take part via JVs with Chinese companies and a number of key industries are off-limits altogether. There are also restrictions for large individual and institutional investors to invest in Chinese equity markets and although quotas have been raised for Qualified Foreign Institutional Investors (QFII), they are still quite limited in the amounts they can purchase.
Mr Manley noted: “The lack of openness is an obvious source of frustration for Canadian investors, particularly given the recent dramatic increase in Chinese investment in Canada. It goes without saying that Canadian investors ought to be afforded the same access to China that Chinese investors are afforded to Canada.”
Estimates on Chinese investment in Canada vary considerably. The Conference Board of Canada and the CCCE estimated that by the end of 2010, China had invested $14.1 billion while Statistics Canada quotes a figure of $10.9 billion at the end of 2011. Chinese figures put the amount of Canadian FDI in China at approximately $8.3-billion for 2011 while Canadian sources cite $5 billion for 2010.