China may have one of the world’s most closely watched economies, but many of its leading global investors have learned to tread cautiously abroad. Jinchuan Group Ltd., the largest Chinese nickel producer, decided earlier this year it would open an office in downtown Toronto. The yet-to-be-determined location will be within a few blocks of the Bank of China on King Street , and will employ less than half a dozen people. The move follows three years spent acquiring significant stakes in a handful of junior mining companies. But none of this activity has attracted much attention, and that may be by design.
China needs energy and raw materials to fuel its continuing expansion. “If China has become the world’s factory, that factory has to be fed,” says Gordon Houlden, director of the University of Alberta’s China Institute and a one-time Canadian diplomat with extensive experience in Asia. “That has meant looking for oil and minerals virtually everywhere.” Canada is uniquely positioned to satisfy that appetite.
And yet this country is not a major destination for Chinese capital. By the end of 2007, Canada had received a total of more than $500 billion in outward direct investment (ODI); of that, an estimated $616 million came from China — a relative pittance made all the more remarkable given that country is our second-largest trading partner.
The situation has much to do with conflicted attitudes toward the Middle Kingdom. Paradoxically, Canada is at once eager to strengthen ties with the world’s fastest-growing economic juggernaut, and at the same time deeply suspicious of the motives underpinning its ODI. As with Jinchuan, many of China’s largest investors are owned by the state. In Canada and other developed economies, that has stoked fears that Chinese ODI is all part of a Communist master plan for world domination. But are there legitimate reasons to discourage Chinese investment? Or is Canada driving away a valuable partner?
Ron Wandel, manager of investment attraction for the city of Toronto, recalls receiving a delegation from Shanghai five years ago. “One of the delegates asked how many Chinese companies had expressed an interest in locating here,” Wandel says. “And I said: ‘To be honest, zero. I’ve never had an inquiry from a Chinese company.’”
That’s not surprising. Until recently, China’s central government discouraged international adventurism: it capped total outward direct investment and insisted that any company seeking to invest abroad first obtain special approvals. There was some activity in the late 1990s, as money from mainland China poured into Hong Kong in anticipation of the former colony’s handover from Britain. But, generally, China’s insularity contrasted with the acquisitiveness of other emerging economies, such as those of India and South Africa — not to mention the mountains of investment flowing into China from abroad. The world came to China — not the other way around.
That changed around the same time China joined the World Trade Organization in 2001. Chinese government officials began hurling slogans such as “Going Global” and “National Champions” to describe their hopes of building a new generation of enterprises with brands that would be recognized around the globe. Beijing significantly relaxed restraints, introduced subsidies and policies that encouraged investment, and offered cheap financing via state-owned banks.
That formula produced the desired result. By the end of 2005, more than 10,000 Chinese firms were said to have operations outside the country. The volume of ODI flowing out of China has been relatively small: by the end of last year, it stood at a cumulative total of nearly US$94 billion. Compare that to US$2.8 trillion by the United States — the world leader — or even emerging-market competitor Brazil, with US$107 billion. What sets China apart is the rapid growth rate of its ODI — growth which, if sustained, will make the country a major source of ODI. “We’re at the very early stages of Chinese investment abroad,” says Houlden.
Several forces have spurred the coming out. China has enjoyed an almost embarrassingly high trade surplus (nearly US$372 billion last year) and burgeoning foreign reserves, owing to massive global demands for its exports. The Chinese government has more foreign currency than it knows what to do with — nearly US$2 trillion and counting. Last year, a massive new sovereign wealth fund, China Investment Corp., arrived on the scene armed with US$200 billion from state coffers. “They’re producing a lot more than they consume,” explains Todd Lee, Greater China team leader at Global Insight, an economic and political forecasting firm in the Boston area. “The savings they acquire, they can either invest in treasuries or they can invest overseas in acquiring assets.”
A crowded marketplace also helped. Many industries in China now suffer what amounts to a capitalist nightmare of excessive competition, which has squeezed margins significantly. That has encouraged domestic companies to look abroad for new frontiers.
At the same time, China is on a quest for global recognition. The country is a manufacturing powerhouse, but almost invariably, the nameplates slapped on its appliances, electronics and other goods have belonged to multinational corporations. Its government is eager to replicate the success of Haier, an appliance manufacturer that ranks among the few Chinese brands to become a household name in other countries.
But there are obstacles to China’s global forays. Mergers and acquisitions have emerged as its preferred method of overseas direct investment, but many of its management teams lack expertise in executing such complex deals. Compounding matters, they sometimes resist asking for help. “The Chinese don’t have a strong respect for service providers” such as accounting and legal firms, says Sarah Kutulakos, executive director of the Canada China Business Council, a trade promotion organization with offices in Toronto, Vancouver, Shanghai and Beijing, and roughly 300 members, mostly Canadian businesses. That fact, coupled with M&A inexperience, may help explain why China has gained a reputation for overpaying.
Perhaps the greatest obstacle, though, is that when China goes shopping in western countries, it sometimes finds its money unwelcome.
Canadian multinationals have not been passed over entirely by Chinese investors. In late 2005, China National Petroleum Corp. took over Calgary-based oil firm PetroKazakhstan. Energy giant EnCana Corp. (TSX: ECA) sold its interests in Ecuador and Chad to Chinese buyers. In July 2007, state-owned Aluminum Corp. of China bought Peru Copper Inc. Months later, China Minmetals Nonferrous Co. Ltd. and Jiangxi Copper Co., also both state-owned, teamed up to buy Vancouver-based Northern Peru Copper Corp. It’s significant, however, that the physical assets in all these deals were located far from Canadian soil. Thus far, much of China’s investment outside southeast Asia has clustered in Latin America and Africa.
It’s sometimes observed that Chinese business people see successful investments and follow the example. Their great experiment in Canada unfolded in late 2004 when a large state-owned mining interest, China Minmetals Corp., entered exclusive negotiations to acquire Noranda Inc., a storied mining firm with a legacy spanning more than 80 years. Had the multibillion-dollar deal been completed, it would have represented a massive surge in Chinese investment in Canada. But some didn’t want it. One Liberal MP called Minmetals “an agent of the Chinese government,” and the potential takeover “a back-door nationalization of a Canadian private company by a foreign government.”
The talks ended a couple of months later without result. Noranda later merged with long-time rival Falconbridge Ltd., which was, in turn, snapped up by a Swiss company, Xstrata PLC — amid far less controversy. Meanwhile, the federal government promptly unveiled new measures increasing scrutiny of foreign takeovers. Though officials denied it, the move was widely perceived as a direct response to the Noranda bid.
The incident left a sour taste. “From what I hear from our members, it had a strong impact,” says Kutulakos. “It still gets mentioned. There are still perceptions on the part of many that it was an indication that Chinese money was not welcome here.”
Other intended destinations have proved similarly inhospitable. In 2005, the China National Offshore Oil Corp. tried to buy Unocal, a California-based oil company. Citing national security concerns, Congress referred the bid to President George W. Bush for review. CNOOC withdrew its bid, and Unocal fell to an American firm, Chevron Corp.
Such wariness is hardly without precedent. Japanese corporations often got a cold shoulder when they went on a global buying spree in the 1980s. It was an era when Sony Corp. snapped up famed film studio Columbia Pictures, and Mitsubishi snapped up American real estate giant Rockefeller Group. The role of Japanese industrial policy in building global automotive giants such as Toyota and Mazda, and consumer electronics powerhouses, including Sony and Toshiba, provoked cries of anticompetitive behaviour. Critics bemoaned that the openness of the U.S. market to foreign investors wasn’t reciprocated by Japan. Japanese investors sometimes retorted that rather than fearmongering about an Asian “invasion,” Americans should busy themselves sorting out their massive trade deficit with Japan.
Yet even considering obvious historical precedents, opposition to Chinese expansion has been remarkable. “The fear for China is even deeper, because Japan, after all, is a democracy,” says Lee. “China isn’t viewed that way. It’s much larger, and it’s growing much faster.”
And its global champions are markedly different. The State-owned Assets Supervision and Administration Commission (SASAC) of the State Council is a potent illustration of the ties between China’s government and its largest businesses. Established five years ago, it manages the government’s ownership stakes in several hundred state-owned enterprises (SOEs), and holds great influence when it comes to foreign acquisitions. There are well over 100,000 SOEs, of which roughly 150 are sufficiently large to be considered “central.” While private investors are gaining importance, these SOEs still represent the bulk of Chinese investment abroad — particularly in natural resources.
That situation fuels suspicions that foreign acquisitions by SOEs are more about furthering China’s foreign policy than satiating a rapacious appetite for profit. Lee says that while such fears may be overblown, he would not say they are unfounded. “You are dealing with a government that’s not a democracy.” Some critics accuse Beijing of dabbling in “cartel capitalism” — an alleged nefarious plot that involves undervaluing the yuan, subsidizing exports and accumulating a mountain of U.S. dollars it can use to buy up the world. The country has also frequently been accused of “mercantilism” in pursuing energy security. (In economic circles, that’s a fighting word; mercantilism, which broadly describes an economic theory that promotes protectionism, has been a pejorative ever since economist Adam Smith attacked it in his seminal 1776 book, The Wealth of Nations.)
Aware of such fears, some Chinese business people feel unwelcome in Canada. In 2006, Yiwu Song, a senior executive with the China National Petroleum Corp., told attendees at an oilsands conference in Calgary that while his company was eager to do business with large Canadian oilsands firms, the sentiment wasn’t reciprocated. “We are neighbours,” the Daily Oil Bulletin, an industry publication, quoted him as saying. “So why we cannot join together, I cannot understand.”
A year later, Song gave another conference speech. This time, his tone was less conciliatory. Before a stunned audience in Calgary, he revealed that CNPC had lost its patience. The company, he announced, had withdrawn its support for Enbridge’s Gateway Pipeline. Song flashed slides showing CNPC officials with Venezuelan president Hugo Chavez, Russian President Vladimir Putin, and other leaders of what he described as “politically friendly” countries.
Song’s disenchantment with Canada may be an anomaly. According to Houlden, most Chinese business people hold generally favourable impressions of Canada, viewing it as a friendly, albeit expensive, place to do business. The problem is that their insight often doesn’t get much deeper than that — Canadian opportunities simply aren’t on their radar. Kutulakos agrees: “We get a lot of companies coming through here with delegations, and they only come here because they went to the States, and Niagara Falls is very pretty.”
The only thing worse than being spoken ill of is not being spoken of at all.
Given the inherent challenges, does Canada really want more Chinese ODI? Thirty years of trade missions and political bluster suggest the answer is a resounding yes. At the Canada China Business Council, Sarah Kutulakos argues that Chinese investment would benefit Canadian industries in poor health. “We shouldn’t ignore a pool of capital as large as China’s,” Houlden says, “particularly where it can lead to increased trade flows stemming from those investments.”
Ron Wandel, the City of Toronto’s manager of investment attraction, says one of the greatest roadblocks to building relationships is that Chinese business people often find it difficult to visit Canada. Many Chinese missions he hosts wind up being postponed due to travel complications. “There are a lot of hoops to go through to come to Canada, both on the Chinese side and the Canadian side,” he says, citing difficulties obtaining visas in a timely manner. “We don’t have a tourist agreement in line between the two countries, unfortunately.”
Houlden suggests Canada complete a Foreign Investment Promotion and Protection Agreement (FIPA) with China. A FIPA is a bilateral agreement that formalizes the treatment of foreign investment between two countries. China already has FIPAs with more than 100 nations; Canada and China have been in negotiations since 2004, so far without tangible result. “It’s not so much that either country is likely to expropriate resources,” Houlden explains. “Psychologically, it’s advantageous for both sides.”
The greatest challenge, though, may well be rooted in the Canadian psyche. And it certainly doesn’t help that Prime Minister Stephen Harper and his Conservative government in Ottawa have had lukewarm relations with China, at best, over the issue of human rights.
Australia offers an example of a western nation that has successfully built stronger ties with China. Until several years ago, Chinese ODI in that country was about the same as it was in Canada — that is to say, almost non-existent. Yet over the past two years, Australia has attracted tens of billions of dollars’ worth. One lesson to be drawn from the Australian experience, is that vague suspicions about Chinese intentions must be put aside; while Australia hasn’t proven immune to such fears, “it’s not a dominant theme,” according to Houlden. “There’s broad, bipartisan support for a close economic relationship with China…and if you have repeated stories in the Chinese media about massive multibillion-dollar investments in Australia, that’s the kind of publicity that makes people think, ‘Aha! There’s a friendly place to invest!’”
China has not proven immune to global recession, however. Global Insight’s Lee believes growth in Chinese ODI will slow, or even reverse, over the next few years, as the government turns its attention to stimulating local growth. (In November, Beijing announced a two-year, four-trillion-yuan [US$586 billion] stimulus package directed at 10 sectors, from infrastructure projects to environmental initiatives.) “I can’t imagine they don’t want to keep their capital domestically,” Lee says. “I’d be surprised if they made any bold moves abroad, especially in the more controversial sectors.”
But longer-term expansion plans remain intact, he says. And with capital growing scarce around the globe, China might suddenly discover its money welcome after all.