Opening the doors to Chinese investment

Canadians do not welcome investment with China as they do other countries, but we can’t afford to ignore the economic giant.
By: /
July 8, 2015
The Syncrude tar sands mine north of Fort McMurray, Alberta, November 3, 2011. Syncrude is one of the largest oil sands producers in Alberta. REUTERS/Todd Korol

Since China’s entry into global markets as a major player, questions surrounding Chinese investment in Canada have abounded: Do we need it? Do we want it? Even if we both need and want it, are the benefits and risks acceptable to us?

The first is easy enough to address: a country of 36 million cannot generate sufficient capital to develop our vast territory, especially as we are a country of consumers, not a country of savers. We thus must look elsewhere to find capital.

But why turn to China? In essence, it is because it is becoming increasingly difficult to turn away from China: China’s modernization, multiplied by its size, is having an impact on the world of the same magnitude as Britain’s industrialization in the early 19th century and America’s in the late 19th century. Investors in the centres of London and New York have been joined by those in Hong Kong and Shanghai as economic engines not just for their own countries, but as the main drivers of projects in many places around the globe as well. Certainly, Canada can manage without Chinese FDI, but there is a difference between being prosperous and merely managing, and ignoring such a large player is not without economic consequences.

These consequences include missing out on investment stemming from massive Chinese reserves of over US$4 trillion. For comparison, the six next largest foreign exchange reserves (those of Japan, Saudi Arabia, Switzerland, Taiwan, South Korea and Brazil) combined total just under US$3.7 trillion.

Considering this need for foreign direct investment (FDI), Canada should be focusing on the worrying gaps that exist in how it attracts FDI.

While Canada has done reasonably well by most metrics vis-à-vis other countries in terms of attracting foreign investment, there are still such gaps as Canada’s troubles with attracting investment to sectors other than the resource sector – gaps which hamper Canada’s competitiveness and ability to tap into the variety of potential investments that FDI may bring.

In the resource sector we are doing well – with a few exceptions – but there are issues with public support. The Canadian public tends to see FDI as a negative for the country, and view Chinese investment as even more so. We know through the China Institute at the University of Alberta’s annual survey on Albertans’ views on China, and through the Asia Pacific Foundation of Canada’s 2015 national opinion poll, released in June, 2015, that foreign investment from certain countries, especially China, is less welcome than investment from Japan, the U.S. or Europe. Natural resources trigger this response in a way that investment in a new manufacturing plant does not. Thus, policy-makers and financial leaders on both sides of the Pacific must acknowledge that many Canadians do not want Chinese investment, at least for now.

The realities surrounding where a large portion of money lies, however, mean that ignoring FDI from large sources of investment, China included, will make it difficult to maintain the prosperity levels most Canadians are accustomed to.

If we need capital – and we do – Asia has the deepest pockets and the longest time frames, with a willingness to stand behind long-term projects and not managed by short-term results of the kind demanded by some U.S. trust funds.

If we need capital – and we do – Asia has the deepest pockets and the longest time frames, with a willingness to stand behind long-term projects and not managed by short-term results of the kind demanded by some U.S. trust funds. For a country with a relatively small labour pool available to develop and maintain such a vast expanse of projects, Canada often needs partners who are willing to look at long-term results over immediate ones. At the same time, Canadians must also weigh the long-term implications on Canada’s prosperity that would stem from ignoring Asian investment.

While China’s pockets are indeed deep, China also comes with baggage, baggage in terms of its political system, how different that system is from our own, and the political, strategic and military challenges that China can represent. Canadians remain wary of some of the complex narratives and issues that flow from a country of 1.4 billion people. Examples include China’s extensive network of state-owned enterprises (SOEs), which have a far greater degree of state supervision and control than is the norm for SOEs from most other countries – and which have over 99 percent of their senior managers as Communist Party members. (This is the case for most senior officials in China.)

The nature of virtually all SOEs entails that they have to wear the brand of their country in much of what they do, and Chinese SOEs face a large problem when that brand is generally seen as negative in North America.

On the one hand, this means that those SOEs who do invest in Canada are well aware that they are being scrutinized, and they are generally eager to stay within the bounds of Canadian business norms; on the other hand, the level of public suspicion they encounter can dissuade potential investors from entering the Canadian market.

Yes, we do need to have Canadian concerns about China reflected in our foreign policy, but we must also remember that investors have choices. Governments can take a measured approach to engaging with China, demonstrating concern while also ensuring we are not forgoing investments of benefit to Canadians.

What of security issues? Personally, I find little cause for concern when it comes to security issues relating to the export of resources – if we ever stopped wanting to export oil, potash or lead as a sovereign country we would simply turn off the tap. Thus, some concerns over security are overblown. However, small Canadian companies that have leading technologies need to be wary, but there are strategies available that can minimize risks to their intellectual property when dealing with Chinese investor and the vast Chinese market.

Discussions on the benefits and risks of FDI are rooted in discussion and debate involving universities, governments, think tanks and the media. How we engage with China on the topic of FDI will be in no small part determined by to what extent these public forums are able to assess the value of Chinese foreign investment in Canada, and to convince the public of their merit.

This article is based on a recent talk for the Canadian International Council’s Edmonton branch.