Canada is one of the world’s foremost resource economies, and China is the planet’s largest consumer of resources. Although Canada is looking to diversify its sources of foreign direct investment, Chinese companies have emerged as one of the most active of those types of investors. In theory, this looks like a convergence of interests— a view the governments of both countries seem to share. The problem is the rest of Canada. Voters in Canada have a long history of opposing foreign takeovers of companies, which has caused problems in the past for big acquisitions. That seems likely to continue into the future.
Investment is on the rise, to be sure. Overall foreign direct investment from China into Canada has surged since 2007, when the total was C$4.2 billion ($4.28 billion), according to Statistics Canada. That was the first year the amount surpassed C$1 billion; every year since 2009, it has run at least C$11.5 billion. China invested C$28 billion from 2007 to 2013 in Canadian oil and natural gas alone, according to research from Toronto-headquartered law firm Blake, Cassels & Graydon, known as Blakes, which has provided legal counsel to Chinese acquirers on several matters. China is on pace to become the second-largest direct investor in Canada, behind the U.S., by 2020. Already, China is the world’s largest consumer of natural resources. Its interest in Canada is an attempt to satisfy that demand: Of 125 Chinese acquisitions of Canadian companies tracked in the past decade by London–based financial information provider Dealogic, three fourths were in oil, gas or mining.
In a strictly commercial sense, China’s interests come at just the right time for Canada. Petroleum products are its top export, but its main customer, the U.S., has found enough shale oil and natural gas in recent years to prompt speculation that further increases may be unnecessary. Canada may need more buyers, which in turn might benefit its energy sector in several ways. Building the infrastructure needed to reach China or other points in Asia could boost producers’ leverage by giving them more potential customers.
But this process comes with an inherent level of political risk. Canadian law allows the government some leeway in how it approves or rejects proposals. Acquisitions of a certain size (the threshold varies by sector and by whether the country of the acquirer is a member of the World Trade Organization or not) must be approved by Canada’s government, which is tasked by the Investment Canada Act with allowing only those takeovers or mergers by nonnationals that provide what the legislation describes as a “net benefit” to Canada. The government has latitude to determine net benefit on a case-by-case basis.
The C$15.1 billion takeover of Calgary, Alberta–based oil and gas producer Nexen by the China National Offshore Oil Co., announced in 2012 and completed in 2013, is illustrative of both the problem and the Canadian government’s desire to overcome it. The acquisition was approved despite large-scale public opposition. But before the deal was finalized, Canada ruled out any future Chinese state actors making purchases of Canadian energy producers with acreage in the oil sands of Alberta. In a December 2012 statement, Canadian Prime Minister Stephen Harper said this was in part out of concern that state-owned actors may have noncommercial objectives, as well as a reflection of a general sentiment against the idea. “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.
Harper has also asserted that foreign direct investment is crucial to Canada and has singled out Chinese buyers as welcome in the country. In September 2013, in the midst of the controversy over the Nexen deal, Canada and China approved a Foreign Investment Promotion and Protection Agreement, another signal that despite sensitivity in some cases, Canada as a rule is actively seeking Chinese investment. Most of the treaty contains elements standard to bilateral trade pacts, such as investor protections and access to international arbitration, though it did generate public frustration. But Canadians opposed to Chinese foreign investment can take heart. While the agreement offers protections to investments, it does not make it any easier for Chinese companies to cut a deal.
Chinese state-owned enterprises attempting to acquire resource companies overseas have triggered fears elsewhere, such as in Mongolia and Australia, so Canadians are not alone in their squeamishness. And they aren’t necessarily opposed to just Chinese state firms. Popular opposition to big-scale corporate mergers has beaten back acquisition proposals in recent years, such as Melbourne, Australia–based mining company BHP Billiton’s proposal to buy Potash Corp. of Saskatchewan in 2011, and the proposal that same year in which TMX Group, which operates the Toronto Stock Exchange, was to merge with the London Stock Exchange.
Canadian companies themselves have chafed under the country’s aversion to takeovers. For years Canada’s largest banks argued that they should be allowed to merge and achieve the scale needed to compete on a global basis, but regulators never allowed a combination between any of the five major lenders. Also, whereas recent controversial acquisitions have come from countries other than the U.S., Canada typically thinks of itself as a small country struggling to preserve an identity distinct from that of its huge neighbor to the south. Former Canadian prime minister Pierre Trudeau in a speech in 1969 compared this to sleeping with an elephant. “No matter how friendly or temperate the beast,” he said, “one is affected by every twitch and grunt.”
Canada may have managed in recent years to strike the balance it wants between participation in the global economy and preserving its own idea of itself; however, that was an era of increasing U.S. investment. With concerns about shifts in U.S. demand, it may be time for Canada to rethink its approach, says Michael Laffin, head of the energy group at Blakes’s Calgary office. “Our biggest trading partner is the U.S., and they are on the verge of being able to meet their own energy needs. So what does Canada do? We must begin to appreciate where our future energy markets are located.”
