On May 8, the University of Alberta’s China Institute held its fifth annual national forum in Toronto. The daylong conference focused on the topic of inbound Chinese investments amid the current context of a slowing Chinese economy and lower energy prices.
There are several recurring themes in the trade relationship between Canada and China I see taking centre stage in the next few years:
1. China’s economy is slowing and demand for energy and resources is shifting to other industries.
China’s double-digit growth of the 2000s was resource intensive given the focus on infrastructure investments. Chinese growth has slowed with projections suggesting it will hover at around seven per cent for the foreseeable future. China’s slowing growth and excess capacity in real estate and infrastructure will result in decreased demand for Canadian resources and energy. Traditionally an inward-looking company, Chinese companies are now also considering foreign markets for expansion to counter slowing internal demand. China is also exporting its expertise in certain industries, including nuclear energy and high-speed rail, as supported by the central government through recent mergers of state-owned enterprises.
2. Canada’s relationship with China is improving.
The past few years have seen many improvements in the relationship through, for example, the new 10-year visas, the first North American renminbi trading hub in Toronto, and the foreign investment promotion and protection agreement. In addition to these new arrangements, the Canadian government and its provincial counterparts have been increasing their presence in China by opening second- and third-tier city trade offices. From an inbound investment perspective, Canada continues to be the jurisdiction with the lowest corporate tax rate among the Group of Seven countries.
3. Canada needs to increase its visibility within China.
Although there have been many policy improvements between both countries, Canada suffers from a lack of visibility given its relatively late arrival in China, especially in comparison to competitors such as Australia.
One issue that affects Canada’s image abroad is the relative uncertainty related to major foreign investments given the risks associated with the application of the Investment Canada Act and, more specifically, the net-benefit test and the national security review regulations. The net-benefit test allows Industry Canada to block proposed investments over certain thresholds if they don’t provide a net benefit to Canada. Since 2009, the national security review of investments regulations also allow the minister of industry to block deals on the grounds of protecting national security.
A policy statement by the federal government in 2012 after the approval of the Petronas Carigali Canada Ltd. acquisition of Progress Energy Resources Corp. and the CNOOC Ltd. acquisition of Nexen Inc. also limits any further investment in oilsands subject to exceptional circumstances.
These discretionary measures create uncertainty in the eyes of foreign investors. High-profile failed transactions such as the BHP Billiton takeover of Potash Corp. (blocked on the grounds that it failed to meet the net-benefit test) and the Accelero Capital Holdings takeover of Allstream (blocked on the grounds of national security concerns) are examples of the risk foreign players face when considering Canadian investments.
4. Chinese investments in Canada have overwhelmingly been in the energy sector in Alberta.
Data from the China Institute’s China-Canada investment tracker illustrate the major industry and geographic focus of inbound investments over the past two decades. Since 1993, 80 per cent of Chinese investments in Canada have been in energy, 10 per cent in metals and minerals, and the remainder in other industries. Of those investments, 90 per cent were in Alberta with the remainder sprinkled across the country.
The focus on energy and Alberta is slowly waning given the economic shift in China and the fall in energy prices. Current trends include greater industry and geographic diversification as well as more numerous but smaller dollar-value deals. Recent high-profile deals include the acquisition of Cirque du Soleil of Montreal by Fosun and the King Blue real estate project in Toronto by Greenland Holding Group Co. but they remain the exception to the focus on energy from Western Canada.
5. Opportunities for Canadian companies remain despite lower energy prices and a maturing economy.
The current economic context still offers many opportunities for Canadians who wish to increase trade with China. The following industries were mentioned repeatedly at the conference:
— Energy: The long-term priority of Korea, Japan, and China remains to secure a stable source of energy. The cyclical nature of the industry explains the recent drop in interest from foreign players. Despite low energy prices, bitumen production in Canada continues to increase and investments in the industry will undoubtedly return once prices normalize.
— Education: Chinese students make up 35 per cent of the foreign student population in Canada and continue to gain market share. English training, college and university programs, and skilled labour training all present opportunities for the education sector as demand from China continues to increase.
— Tourism: Chinese tourists have tripled to 450,000 in 2014 from 150,000 five years ago. Chinese tourists are expected to become the largest source of non-U.S. tourists in Canada in the next few years. This is a real opportunity for the tourism industry to diversify if it adapts to the specific needs of Chinese visitors ranging from language to food and entertainment requirements.
— Clean and green industries: Additional industries with a particular Chinese appetite for investments in Canada include anything related to the green and clean industries from clean and renewable energy sources to agriculture and food-processing services for the Chinese market.
Despite these opportunities, there are several ways for Canada to improve its image and visibility in China.
First, it can clarify the net-benefit test under the Investment Canada Act and the national security review regulations.
Second, it can create flexible immigration policies to welcome skilled labour where shortages exist in order to rapidly execute large investment projects.
Third, it can involve local communities, including aboriginal groups, at the onset of proposed investment projects in order to reduce the risk related to the approval process.
Fourth, it can define and publicize pro-investment policies, such as Quebec’s Plan Nord, in order to improve Canada’s image abroad.
Fifth, it can brand Canada as a gateway to bigger markets such as the United States and Europe as opposed to a final destination given its small market size.
Finally, it can adapt to Chinese consumer demands locally as the number of visitors increase.
Patrick Gervais is a business lawyer at Blaney McMurtry LLP called to the Ontario and New York bars. His practice focuses on a range of commercial matters including mergers and acquisitions, public and private financings, and a range of commercial agreements. Patrick also advises companies on compliance requirements and regulatory matters. He’s available at [email protected].
