Current rules impede Chinese investment in Canadian resource sector

Jul 05, 2012, 10:31 ET from CONFERENCE BOARD OF CANADA

OTTAWA, July 5, 2012 /CNW/ - Canada's current review process for foreign direct investment (FDI) dissuades Chinese investments in Canadian resource industries. While some Canadians are skeptical of foreign investment from China, a Conference Board of Canada report concludes that a better approach is to clarify the Investment Canada Act to set clearly-stated conditions for Chinese investment.

"In our view, Chinese investments are in the Canadian national interest. China is seeking to invest in countries that can meet its growing demand for resources. Canada is looking to diversify the export markets for these same resources," said Glen Hodgson, Senior Vice-President and Chief Economist.

This report, Fear the Dragon? Chinese Foreign Direct Investment in Canada, explores how Canada's FDI rules can be modified to encourage additional Chinese investment, while addressing domestic political concerns.

"Two characteristics of Chinese foreign investment make them among the most politically sensitive in Canada. One is the focus on natural resources and the other is the involvement of state-owned enterprises. A more explicit regime that reduced arbitrary political intervention would be better for these investments."

Previous Conference Board of Canada research showed that the Canadian share of global inward foreign direct investment flows dropped from 16 per cent in 1970 to 3 per cent in 2009. Chinese FDI would help Canada regain a portion of its falling share, which would contribute more broadly to the growth of employment and productivity gains. China has the potential to be the third largest FDI investor in Canada by 2015, and could rank second only to the United States by 2020.

Furthermore, China is seeking to invest globally in resources. About half of China's $14 billion in current investment are in resources, specifically energy. In addition to China's focus on resources, China presents a unique challenge because there are questions regarding whether its state-owned enterprises operate on market or political principles.

The current regime calls on the investor to demonstrate a net benefit to the country. This unclear test creates political risk and makes Chinese investments more costly. As a result, some investments may be dissuaded. However, the opaqueness of the existing Investment Canada Act process makes it impossible to say how many investors refrain from investing in Canada because of these concerns.

The Australian review process serves as a potential model for Canada. Australia attracts about three times as much Chinese FDI as Canada. The Australian regime assesses Chinese investments on the basis of clearly stated conditions related to

ownership and governance of newly-acquired resource companies. Although the merger of Chinese aluminum giant CHINALCO with Australia's Rio Tinto failed, Yanzhou Coal Mining Company Limited, has made two major acquisitions in recent years.

The Conference Board recommends several reforms to the Investment Canada Act that would facilitate Chinese FDI and address political concerns. For example, an explicit foreign direct investment review regime would be organized around two tests: a national interest test and a national security test.

Under the national interest test, the federal government would need to show how an investment is contrary to the national interest. For the security test, specific security risks should be identified and clarified for Chinese investments.

The report is published by the Conference Board's International Trade and Investment Centre. Now in its seventh year, the ITIC helps leaders better understand changes in the global economy and their implications for Canadian international business opportunities and public policies.

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