Analysis: Chinese investment in Canada slows to a snail’s pace

Watch above: The Conservative government’s drive to drum up trade and investment appears to have hit a major snag. Vassy Kapelos explains.

In December 2012, Prime Minister Stephen Harper announced the federal government’s decision to approve the takeover of Calgary-based energy producer Nexen Inc. by CNOOC, a Chinese state-owned firm.

The deal was worth $15 billion, but came with a big caveat: after the Nexen deal, state-owned foreign investment in Canada would be limited to “exceptional” circumstances.

At the time, Harper said “these decisions are not the beginning of a trend, but rather the end.”

Since then though, critics say there’s been little detail about what exceptional circumstances are.

Wendy Dobson, a professor at the Rotman School of Management, recently authored a study on the subject for The School of Public Policy at the University of Calgary.

She says the Chinese are asking “exceptional circumstances, what on earth does that mean in specifics? And so there’s uncertainty.”

Over the last year, there’s been speculation that uncertainty and lack of clarity cooled Chinese investment; now, numbers offer proof of a deep freeze.

According to the U.S.-based Heritage Foundation, which tracks Chinese investment globally, Chinese investment in Canada in 2012 totalled about $21.5 billion dollars.

In 2013, that number fell to about $220 million. Even if you factor the $15 billion Nexen deal out, that’s still a difference of about $6 billion.

And our loss is someone else’s gain – Chinese direct investment in the U.S. doubled in 2013.

“You have to ask then, why is that?, says Peter Harder, president of the Canada-China Business Council. “Are we a less attractive destination? Are we viewed as a less hospitable recipient of foreign direct investment?”

Dobson says yes, “that uncertainty is compounded for Chinese because of honour because of an honour of historical humiliation by Western powers. They don’t want to be embarrassed in Beijing by a turn-down.”

As a result, the oil patch has been hit hard.

The Canadian Energy Research Institute estimates that $100 billion of capital investment is needed by 2019 for the oil sands to reach its “full potential.”

“We don’t have enough dollars in the nation to fund those projects” says Alberta Energy Minister Diana McQueen, “so we have to look to outside investment.”

The Alberta government has spent the last year working with the federal government to get clarity around the new rules for foreign direct investment.

Ottawa, though, maintains it’s open to investment.

In a statement, a spokesperson for Minister of Industry James Moore said, “our Government is open to investment in all sectors of the economy and our record demonstrates this. We continue to focus on issues that matter most to Canadians, creating high-quality jobs and driving economic growth. We will not rubber-stamp every foreign investment transaction; nor will we oppose all foreign investment.”

The approach is specific to state-owned enterprises, which are owned by foreign countries. The federal government has cited national security as a concern. But critics say that doesn’t take into account how the landscape for state-owned enterprises in China is changing.

According to Dobson, the new political leadership installed in China last year has made it clear they’re moving in the direction of a market-based economy.

“What they’re doing is raising their input costs by liberalizing the financial system and raising the cost of capital, ” Dobson said. She adds the new leadership is also “raising energy prices that used to be subsidized to market levels, requiring them to pay dividends to the state, which they haven’t had to do in the past.”

Both Dobson and Harder say the federal government needs to take the changes into account, and be more transparent about its decision-making process for foreign direct investment.

If not, Harder says, “my fear is that the window of opportunity of maximum opportunity for Canada is to be an early mover. If we are second to the fair…we will lose our spot and our relevance.”

Read the full government statement:  

Regarding ambiguity of the ICA:

“Our Government’s balanced approach ensures that foreign investment transactions are reviewed on their merits based on the long-term interests of the Canadian economy. Each proposed investment is examined on a case-by-case basis and on the facts and merits of each proposed investment. “

Regarding criticism of the government’s investment record:

“Our Government is open to investment in all sectors of the economy and our record demonstrates this. We continue to focus on issues that matter most to Canadians, creating high-quality jobs and driving economic growth. We will not rubber-stamp every foreign investment transaction; nor will we oppose all foreign investment.”