Canada and Chinese SOEs

It's time to rationally address the opportunities and policy challenges that Chinese State-owned enterprises in Canada present, says Hugh Stephens.
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October 29, 2013
CNOOC.jpg

Last year, an application for judicial review was brought to the Federal Court by the International Union of Operating Engineers and the Construction and Specialized Worker’s Union. At issue for the two unions was the government’s decision to allow HD Mining International, a Chinese owned company, to bring in 201 Chinese temporary workers to work at its underground coal mine in Tumbler Ridge, BC. The unions were supported by the powerful United Steelworkers Union, which commissioned a study to investigate the background and ownership of the Chinese company at the centre of the dispute. It published a report, ominously entitled, Who Owns Huiyong Holdings?

The Federal Court dismissed the unions' complaint that the company had not made sufficient efforts to recruit Canadian miners before applying for permission to bring in temporary workers from China, as well as their accusation that the company had been planning to pay substandard wages to said workers, but the damage was done. When the story hit the press, then Human Resources and Social Development Minister Diane Finley ran for cover, blamed her officials, and put the whole temporary foreign worker program under review. The provincial government wasn’t much better. A few Chinese miners arrived but they were not allowed to work. Soon after the company sent them all home, where they’re likely to remain, at least for now.

At any given time, there are about 400,000 temporary foreign workers in Canada. In the past five years, Tim Horton’s has brought in over 14,000 such workers, 11,000 of which are from the Philippines. It is hard to see how 200 Chinese miners would have posed a real threat to employment in Canada. The media coverage of the Tumbler Ridge story, which suggested Chinese workers employed by a Chinese company can only be bad news because the company is likely controlled by the Chinese government, begs the question of why we don’t see protests about Filipino or Mexican workers. The idea seems to be that the introduction of Chinese workers employed by Chinese companies will inevitably lead to the introduction of lax Chinese safety and environmental standards.

British Columbia has a long history of anti-Asiatic labour agitation, going back to the days of the infamous “head tax” and the Chinese Immigration Act of 1923. The Act resulted in the almost total exclusion of Chinese immigrants for a quarter of a century, during which time Canada took in over 1 million immigrants. In fact, between 1923 and 1947, when the Act was repealed, only about 50 ethnic Chinese were admitted to Canada (one of whom was a future Governor General, Adrienne Poy, aka Clarkson). But those were the bad old days, right? Things have changed. Apologies have been made. We live in a more enlightened era. China, India and the Philippines are now the no. 1, no. 2 and no. 3 sources of immigrants to Canada.

Well, the overt racism of the past may have gone, but in its place today we increasingly find a fear of China more broadly.  In the old days, there was fear and dislike of Chinese workers (by workers and unions but perhaps not by employers) because they worked too hard for too little. Today there is a fear of China because it is big, powerful, wealthy, and seems to have both a long-term plan and the political will to carry it out. Moreover, it is perceived by some as a monolithic totalitarian state, directed by a party that still espouses elements of Marxist ideology, with a strategic vision of dominating the world.

That perception is very relevant to any examination of investment in Canada by Chinese SOEs. When the United Steel Workers wanted to discredit HD Mining, it set out to prove that the company was really a front for the Chinese government. Since it couldn’t prove so definitively, it resorted to statements like, “Given Huiyong (Holdings) close ties with the Chinese government, and its (controlling) stake in HD Mining… does this mean that the Chinese government has near total control (emphasis added) of the mining operations… at Tumbler Ridge”? Or, “The Chinese owned and operated mines in northeastern BC appear to be aimed at nothing more than creating profits for offshore companies with questionable links to the government of China”. China’s government was the bogeyman.

In actual fact, it is quite likely that HD Mining has strong connections to, and indeed may ultimately be owned by a provincial SOE, likely in Shanxi, where it is based. According to Dr. Chen Duanjie at the University of Calgary, even though the number of SOEs has been reduced substantially over the past decade, the number of non-financial SOEs in China numbers over 114,000. Only about a quarter of these are regulated at the national level and only 116 of the largest SOEs come under the administration of SASAC (State Owned Assets Supervision and Administration Commission of the State Council). But there are literally tens of thousands of SOEs in China, most of them involved in domestic trade; many of even the largest ones, such as China Telecom, conduct essentially no business outside of China. It would therefore not be surprising to find elements of some form of state ownership behind a Chinese mining company, or an overseas subsidiary operated by such a company. Major Chinese oil companies, especially oil companies whose specific mandate is to go offshore and explore (like CNOOC), obviously operate internationally.

These SOEs are the legacy of China’s failed experiment with socialist central planning. As China has moved from a planned economy toward a more market-oriented one, state monopolies have been converted into state-owned enterprises that operate according to conventional business principles (admittedly “with Chinese characteristics,” as they say). A number of these SOEs have moved into the international sphere and are now listed on global stock exchanges; CNOOC International is one. The interest of some of these SOEs in investing in Canada is forcing Canadians to consider the question of how federal and provincial regulations should approach them.

There are widely differing views and the answer has yet to be settled. According to Margaret Cornish, former director of the CCBC in Beijing and now a representative in Beijing for the law firm Bennett Jones, “Investments in Canadian resources by Chinese SOEs offer an opportunity to Canadian firms and governments to accelerate (the) adaptive process of augmenting existing supply chains, managerial networks and sources of technology. At the same time, Canada is in a position to assist Chinese resource SOEs in demonstrating that they are able to successfully operate in an OECD-level regulatory system…". She goes on to say, with regard to the relationship between the major SOEs and SASAC (the arm of the Chinese government that governs them), “SASAC’s mandate is to ensure that state-owned assets are managed according to the rules to generate an appropriate return for its percentage share, and to control for agency and corruption problems”. The focus of SASAC-supervised SOEs is on near and long term profitability as reflected by the predominance of financial criteria in assessing performance”. (Cornish, 2012). That doesn’t sound too threatening – indeed all multinational companies strive for profitability.

However, Dr. Chen at the University of Calgary has a different take. She says, “Chinese SOEs do not operate by the normal rules of commerce. They are, in fact, a very powerful tool of the Chinese government’s industrial policy which is aimed at ruthless expansion (emphasis added) of its global economic empire”. “Party control of the top executives of central SOEs has ensured that those who are ambitious in climbing the government and Party ladders must obey Party orders more than ensuring the efficiency of the SOEs under their watch”. That is certainly a much more ominous-sounding and negative view.

These two studies can perhaps be considered the bookends of the debate. Ms. Cornish goes to some lengths to prove that SOEs are largely governed by normal commercial motives and incentives, and that they act rationally in accordance with these standards. Dr. Chen clearly sees some sort of strategic plot, indeed a threat. She also points out that SOEs are very different from the Canadian Crown Corporations to which others have compared them.

Whatever you think of SOEs, it is clear that they are significantly different from Canadian Crown Corporations. Crown Corporations (today at least) are the residual tail of what was once a fairly active intervention by the Canadian state in various sectors of the economy, allegedly for special policy reasons. If we look back at some of the original Crown Corporations, such as the CNR, Trans-Canada Airlines/Air Canada, Alberta Government Telephone, Atomic Energy of Canada, Petrocan, etc. they were somewhat more like today’s Chinese SOEs. Those that remain, fewer in number year by year, (EDC, CCC, Via Rail, Royal Canadian Mint, CBC and some more esoteric ones, such as the Atlantic Pilotage Authority, the Blue Water Bridge Corporation and the First Nations Statistical Institute) are quite different. Let’s accept that SOEs and Crown Corporations today are quite different animals and move on.  

Much more relevant are the benefits that inward investment from offshore companies, including SOEs and specifically Chinese SOEs, can bring to Canada and associated with that, the question of how Canada should deal with offshore SOEs. The immediate precipitator of course is Investment Canada’s approval of two majority SOE investments in the oil and gas sector: the $5 billion acquisition of gas player Progress Energy by Malaysian SOE Petronas and the larger ($15 billion) acquisition of oil producer Nexen Inc. by CNOOC. As we know, those deals required lengthy review processes. Only after multiple extensions was final approval granted and even then, it came with several caveats, the most notable being, “…given the inherent risks posed by foreign SOE acquisitions in the Canadian oil sands, the Minister of Industry will find the acquisition of control of a Canadian oil sands business by a foreign SOE to be of net benefit to Canada on an exceptional basis only” (emphasis added). In other words, barring unspecified “exceptional circumstances”, investments by SOEs involving majority control of oil and gas properties are off-limits.

This was supposedly meant to send the signal that while Canada remains open to foreign investment, SOE investment will be looked at differently. In the words of the Prime Minister, “When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments”. With the Petronas and CNOOC approvals, the industry breathed a (temporary) sigh of relief, as a number of developments, including the building of LNG terminals on the BC coast, were at issue. The relief was short-lived.

In a recent statement reported in the National Post, former Minister of Industry Jim Prentice noted that investment by Chinese state owned enterprises in Canada, which totaled $33 billion between 2005 and 2012, "has fallen off a cliff”. FDI in the oil industry has dropped 92% this year. Merger and acquisition activity has dropped from $66 billion to $8 billion. That decline is a result of several factors.  According to Mr. Prentice, it is because there are currently more sellers than buyers in the oil patch (and with the new Investment Canada restrictions, Canada has just ruled out an important set of prospective buyers); because Canada has an infrastructure deficit (not enough facilities to get the product to the right markets—Keystone XL etc); and due to the impact of foreign investment rules. So while the policy decision on CNOOC is not the only factor, it is an important factor.

Mr. Prentice has stated that, These companies (SOE investors) have their eyes on Canada but they don’t want to be rejected. They certainly don’t want an embarrassing confrontation with a western government. …Right now they are puzzled by Canada”.

So that is the dilemma. Should we treat SOEs, especially Chinese SOEs, differently on an a priori basis, and is it in our interest to do so? Or should we be welcoming investment from all available sources, including Chinese SOEs?

Some, like Dr. Chen at the University of Calgary, are clearly not convinced. Others would argue that we should not open “sensitive” areas of our economy to companies controlled by a government that does not share democratic traditions as we interpret them. However, if we limit the commercial transactions that we deem to be in our interest only to those with countries who share all of our values, we will be cutting ourselves off from a good portion of the international community. Who else should be out of bounds? Russia? Saudi Arabia? The Gulf States? Cuba? South America in the old days? China yesterday and today? The list could go on. Of course we do trade with such states (North Korea and Iran being the only exceptions these days) on the basis of self-interest. That is the core issue – whether investment in Canada by Chinese SOEs is or is not in Canada’s interest.

 My response is a strong “yes”, but with some qualifications. These relate to the need to exercise due diligence and apply our laws and regulations in a fair and consistent manner to all players on a level playing field. The SOEs eyeing Canada are hardly a bunch of benign, cuddly little panda bears. They are big, muscular corporations pursuing their own interests as all large corporations do. According to the Fortune 500 Ranking, Sinopec ranks 4th among global oil companies by revenue, following Shell (which is in partnership with SaudiAramco, a Saudi SOE) ExxonMobil and BP (formerly state owned), and ahead of China National Oil Company, Chevron, Conoco Phillips, Total (formerly state owned) and Gazprom (effectively state owned). CNOOC is 25th on the list. The largest Canadian company is Suncor, is 36th. The Chinese companies at issue are not bit players.

In Canada we have learned to deal with major corporations, not only in the oil and gas sector but in the mining, agriculture, forestry and manufacturing sectors as well. If we can handle ExxonMobile or General Motors, we can arguably manage a relationship with CNOOC, Minmetals, Sinopec or other Chinese SOEs. Margaret Cornish makes the point that “Foreign corporations (including of course SOEs) must all abide by Canadian laws, and all Canadian jurisdictions have the wherewithal to enforce vigourously their health and safety, labour and environmental protection laws. Canadian transfer pricing and administration is in place to address any concerns that SOEs might try to export to China at prices below market price”. (Cornish, 2012). All companies in Canada are subject to competition law, and in addition, those companies that have been required to submit to investment review through the Investment Canada Act “net benefit” process have made other undertakings that are legally enforceable. CNOOC for example, made a number of commitments with regard to maintaining its management and operations in Canada, CSR activities, transparency in reporting, listing on the TSX, etc, all of which can be found on their website.

We in Canada have the tools to do the job. Canada is not the Sudan or other parts of Africa where Chinese SOEs have acquired a poor reputation with respect to their interactions with local communities. But then the record of the West in Africa, and even of some Canadian mining companies abroad today, is far from exemplary. If we in Canada allow ourselves to be exploited, that responsibility falls on us. On the other hand, if we can structure an environment that will benefit Canada – one that ensures that foreign companies play by the rules and attracts needed investment from sources that have the funds and motivation to invest – we should do so.

I believe that it is in Canada’s self-interest to continue to encourage Chinese SOEs to invest in Canada, according to transparent and fair criteria. We have the means and experience to ensure that these investments bring mutual benefit to both China and Canada. What is important is not where the money comes from but how it behaves once it is in Canada. That should be our bottom line.

We should not, however, delude ourselves into thinking that these companies are not pursuing their own self-interest, a self-interest that is related to China’s long-term strategies for securing access to world markets and resources. While not the same, does anyone not think that the U.S. government doesn’t follow, influence, encourage and support the activities of its multinationals in areas considered of economic and strategic importance to the United States?

In closing, let me offer some specific recommendations:

The “net benefit” test, which has been kept deliberately vague, needs to be further clarified to remove uncertainty and provide greater guidance as to what is expected from foreign investors. While ultimately the government has to retain some flexibility (and is the ultimate decision maker), we should operate on the basis of “no surprises”. Investment policy should not be a moving target. The mixed signals that have been sent that Canada is open for business, except for certain types of companies in certain sectors, is not in our self-interest. The stipulation that a whole sector is off-limits “except in exceptional circumstances” is not helpful.

The lower investment review threshold for SOEs should be re-examined.

Irrational fear of China, which some call sinophobia, whatever it is based upon, should be removed from the equation.

Canada should continue to strengthen trade, investment, cultural, diplomatic and strategic linkages with China, building upon the efforts of the past 40 or more years of bilateral diplomatic relations. Canada can play a role in encouraging Chinese SOEs and companies to integrate more closely with the global economy, to adopt more market-driven and transparent systems of governance, and to recycle the wealth that China is accumulating through its current export-led economic policies. Progress on all of these fronts will be to our benefit.

Let us be rational, not emotional; respectful but confident and alert. We should not close the door on Chinese SOEs and the significant investment they can bring to the oil sands and elsewhere. To paraphrase the Chinese proverb, “let’s not drop a rock on our own foot”.

This opinion piece is based on a talk given by Hugh Stephens to the Canada-China Friendship Society in Ottawa on October 16, 2013.