The Asia Pacific Foundation of Canada
found in a national opinion poll earlier this year
that only 16% of Canadians approve of a Chinese
state-owned enterprise acquiring majority control
of a Canadian company. Why do more than 70% oppose
such an action? The torrent of commentary that
emerged in the wake of the proposed CNOOC-Nexen
acquisition provides a useful guide to arguments
against Chinese SOE investment - and why the
Canadian government should resist knee-jerk or
populist responses.
Leading the charge on
a strictly nationalist response is business
columnist Diane Francis, who fears Canada is on
the path to becoming a "colony waiting to be
conquered again." She would impose a 10% limit on
all foreign ownership of Canadian companies, with
the exception of green-field projects. She joins a
growing chorus that laments the loss of Canadian majority
ownership in corporate
icons such as Alcan, Inco, and Viterra - but she
goes much further in calling for radical limits on
foreign ownership.
Whereas Francis would
apply her foreign ownership rule to both
state-owned and private enterprises, other
commentators single out state-ownership as the
stumbling block in the Nexen deal. They argue that
Beijing will dictate how CNOOC should operate,
which could lead to non-market decisions contrary
to Canadian interests.
A variant of this
argument focuses on state-owned enterprises from
China in particular. Claudia Cattaneo fears being
"played" by China but does not articulate similar
concerns about other major state-led investment in
the oil patch, for example by Malaysia's Petronas,
Korea's KNOOC and KOGAS, Norway's Statoil, and
Thailand's PTTEP. Others oppose Chinese investment
because of grievances against the Chinese state,
from human rights issues to the role of China in
international affairs.
Jack Mintz views
foreign state investment as a form of
"nationalization" of Canadian industry. His
objection to the CNOOC deal is based on the
grounds of unfair competition (since the company
is subsidized by the Chinese state), and the
belief that SOEs perform less well than private
companies in the long run. Mintz would place
limits on all foreign SOE investment in Canada
(excepting green-field projects), including
state-linked pension funds and sovereign wealth
funds.
A relatively new and increasingly
popular line of argument is to use Chinese
investment interest in Canada as a bargaining chip
in bilateral relations. Roger Martin argues that
the only standard for assessing the CNOOC deal is
reciprocity from the Chinese government. Derek
Burney and Fen Hampson take a similar position,
but throw our relations with the United States
into the mix, arguing for a strategic response to
Beijing that also sends a clear signal to
Washington.
The outpouring of views on the
CNOOC-Nexen deal is a healthy development in a
Canada-China relationship that is still very much
in its infancy, and in a context where Canadian
awareness about the rise of China on the global
stage is relatively superficial. As Ottawa ponders
its response, there is a danger of a populist
response fueled by public suspicion of China and
the misdiagnosis of experts.
The decision
on CNOOC-Nexen should be based on a combination of
principle, strategy, and prognosis, but the three
elements are not weighted equally and they each
contain opposing forces.
The starting
principle for this decision and indeed on the
reputation of Canada's investment environment
should be on the question of openness to foreign
investment. Anything other than an unequivocal
statement in favor of openness (let alone a curb
on foreign investment along the lines of the
Francis proposal) would send a very negative
signal.
Some argue that the principle of
openness to foreign investment should be weighed
against concerns about reciprocity. But if we
believe that foreign investment is good for
Canada, why would we impose a condition that works
against our interest? The government has recently
made bold decisions on economic liberalization (in
the area of tariff reduction and marketing boards)
that were based on perceived benefits to
Canadians, rather than on reciprocity by trading
partners.
The good news is that Canada and
China may be on the verge of talks on closer
economic cooperation. This would serve as the
appropriate forum for negotiations on reciprocity
in trade and investment, as opposed to holding
hostage a specific investment proposal that
accounts for a small share of Canadian oil and gas
assets. Likewise, a strategic approach that
attempts to simultaneously leverage our bilateral
relations with China and the US works in opposite
directions.
Ottawa cannot hint
indefinitely about diversification away from the
United States and remain credible unless it moves
decisively on energy relations with China and
other Asian countries.
Mintz's concern
about proxy nationalization is important, but I am
less worried about the actual takeover than I am
about future performance. To the extent that the
Chinese state subsidizes CNOOC, Nexen shareholders
will benefit from a higher takeover price. This
may be bad for Chinese taxpayers, but it should be
seen as a "net benefit" for Canada.
A
legitimate concern, however, is that state-owned
enterprises - and CNOOC in particular - will
underperform in the medium to long-term because
they don't face the same kind of market pressures
that private companies have to respond to.
This question, however, should rest with
shareholders rather than with government
officials. After all, one can legitimately
question the management capabilities of any
foreign investor - private or state-owned - and
Ottawa is not well-positioned to make such a
judgment.
This is not to dismiss broader
apprehensions about the behavior of state-owned
enterprises that go beyond business performance.
There is growing evidence that SOEs behave like
private sector players (for better or worse) and
are subject to market pressures that come in part
from listing on major stock exchanges.
State-owned enterprises, however, are not
the same as private companies, and there is at the
very least a theoretical risk of state-directed
actions that are inimical to Canadian interests.
The best way to address such actions, however, is
through domestic regulations that apply to all
companies rather than by discriminating against
SOEs as such.
Yuen Pau Woo
[yuenpau.woo@asiapacific.ca] is president and CEO
of the Asia Pacific Foundation of Canada. This
article was originally published in iPolitics at
www.ipolitics.ca
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