Putting the squeeze on Chinese investment

CNOOC just landed a $14.6 billion takeover of Canada’s Nexen, but Australia will be watching closely to see if new Canadian rules for state-owned enterprises chill the flow of foreign capital.

Australian politicians grappling with how to answer the Chinese foreign investment question were presented with an interesting case study over the weekend.

The Canadian government approved the $C15.1 billion ($A14.6 billion) takeover bid by state-owned China National Offshore Oil Corp for Canadian oil and gas producer Nexen Inc, which marks China's largest-ever foreign deal. In the same stroke it approved a $C5.2 ($A5.0 billion) billion bid by Malaysia's state-owned Petronas for Canadian natural gas producer Progress Energy Resources Corp.

The bids had been hanging in the balance for months as the Canadian government struggled to reconcile how it would approach growing state-owned foreign investment interest in its energy sector, and deal with what was predicted to be a flood of Chinese foreign investment into Canada if the CNOOC bid was approved.

The solution it came up with represents a bold attempt to draw a line in the sand on state-owned foreign investment that is worth noting for those watching China's moves on Australian energy and agricultural assets.

Canadian Prime Minister Stephen Harper said the CNOOC and Petronas deals would mark an end to state-owned foreign companies being treated the same as private foreign companies. In the future, takeover offers from state-owned foreign companies will face a higher threshold for approval compared with takeover offers from private companies.

"Canadians generally, and investors specifically, should understand that these decisions are not the beginning of a trend, but rather the end of a trend,” Harper said at a hastily-organised press conference. "When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments.”

Under the new plan, privately-operated foreign companies will face a government net benefit review if a takeover is valued at $C1 billion or more. But state-owned companies will face government reviews for deals worth $C330 million or more.

Also, state-owned companies will have to satisfy the Canadian government that their investments in all sectors are commercially oriented and free from political influence. They will have to adhere to Canadian laws and implement standards and practices for "sound corporate governance and transparency”, as well as agreeing to make "positive contributions ... to the productivity and industrial efficiency of the Canadian business.”

This all comes as a response to the fact that foreign state-owned companies represented 20 per cent of all takeovers reviewed by the Canadian government in 2011, up from nearly zero in 2008.

The Chinese government in particular will be pressured to remove barriers preventing Canadian companies from moving into the Chinese market.

Harper is trying to send a clear message to investors, that although Canada's oil sands are in need of significant foreign capital, Canada will be picky in choosing where that capital comes from.

"To be blunt, Canadians have not spent years reducing the ownership of sectors of the economy by our own governments, only to see them bought and controlled by foreign governments instead,” he said. "The government's concern and discomfort for some time has been that very quickly, a series of large-scale controlling transactions by foreign-owned companies could rapidly transform this [energy] industry from one that is essentially a free market to one that is effectively under control of a foreign government.”

Currently, Canada's oil sands account for 60 per cent of the world's oil production that is not under the control of national oil companies. As assets in other parts of the world are snapped up, Canada fully expects state-owned companies elsewhere to increasingly turn their attention to Canada.

"The government of Canada has determined that foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada,” he added.

While there is a segment of Australians who would love to hear those words coming from the mouth of Prime Minister Julia Gillard, Canada's stance on this issue comes with significant hurdles.

For one, Harper has made bolstering economic relations with Asia – and China specifically – a major focus of his government. This decision will presumably dampen the flow of Chinese capital into Canada and cause a number of Chinese business and political leaders to question the mixed signals coming from Canada.

One keen observer of Chinese investment in Canada is Felix Chee, who heads the China Investment Corp's Toronto office. He convinced the CIC that the massive sovereign wealth fund should open their first overseas branch in Canada, over Australia, the United States and Britain, and is a major player in determining the outlook of Chinese foreign investment in Canada.

"I am pleased to see the [Nexen and Progress] deals approved,” Chee told the Globe and Mail newspaper. "But going forward one would expect Chinese companies to re-evaluate their investment plans in Canada to ensure they can still make desirable investments under the new rules. What remains to be seen is whether the flow of inbound investment from China will be lower.”

Also, in targeting Asian state-owned enterprises, Harper risks casting the net too wide. Because the new rules apply to all state-owned companies, firms such as Norway's Statoil will fall under the new rules. Statoil has major investments in North America and hasn't previously ruffled Canadian feathers with its activities. But a company like Statoil may give Canada a second thought if it feels Norwegian capital is not welcome.

Harper has been under pressure to clarify Canada's foreign takeover rules since he blocked the sale of Potash Corp to BHP Billiton in 2010. Although this latest move stakes out Harper's ground on the issue of state-owned foreign investment, it leaves a great deal of uncertainty about how that will be carried out.

It will also do little to appease corporate Canada, which has been pushing for clear and predictable rules that would allow businesses to assess their chances of getting approval before initiating a takeover.

That hasn't yet happened. But for Australians trying to determine how domestic policies on Chinese foreign investment will affect Australia's role in the 'Asian Century', China's next move in Canada will be worth watching.

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