Report rejects Chinese takeovers as threat to Canada

Moran’s paper “Chinese Foreign Direct Investment in Canada: Threat or Opportunity”, was published Monday by the Canadian Council of Chief Executives (CCCE) as part of a series of reports and articles examining the impact on Canada of Asia’s growing economic power.

The mining and oilsands sector is flush with recent examples of Chinese interest in Canadian resources.

In January Canadian oil producer Athabasca Oil Sands Corp. (TSX: ATH) sold its remaining 40 per cent interest in the MacKay River oil sands project to Cretaceous, a unit of Chinese oil giant PetroChina, for about C$680 million.

In the past two years, state-owned Chinese companies such as PetroChina, Sinopec and China National Petroleum Corp. have invested more than $10-billion in the Canadian oil and gas sector, bringing the total stock of Chinese foreign direct investment (FDI) in Canada to $14.1 billion. In December, the federal government approved Sinopec’s $2.2-billion bid for Calgary-based Daylight Energy, the first time a Chinese state-owned entity has succeeded in a 100% takeover of a Canadian oil and gas producer.

China Investment Corp holds a 20% stake in Teck Resources, Canada’s largest publicly traded mining company.

Moran rejects the suggestion that Chinese investments in the natural resource sector have the effect of “locking up” the world’s resource base, arguing that a review of recent Chinese procurement arrangements shows that most of them help to expand and diversify resource production and increase competition.

The report says of 35 investments examined, 23 helped diversify supply and increase competition; most acquisitions were for an equity, not a controlling stake.

As to whether a given foreign takeover poses a risk to national security, Moran recommends a test of three criteria to determine whether the takeover risks national security:

• Would the takeover make Canada dependent on a foreign supplier that might deny or place limits on the provision of goods or services crucial to the economy?
• Would the takeover allow the transfer of technology or expertise that might be harmful to Canada’s interests?
• Could the takeover become a platform for espionage, surveillance or sabotage?

Based on these criteria, the report states that BHP Billiton’s 2010 hostile takeover bid for PotashCorp was rightly rejected by the federal government on national security interests because it “would have transferred control of a major world source of supply to foreign hands rather than helping to expand, diversify, and make more competitive the world supplier base.”

PetroChina’s Mackay River acquisition would pass the national security test, as would Sinopec’s takeover of Daylight Energy, the report states. On the other hand, a hypothetical attempt by a Chinese company to acquire a Canadian rare earth producer (there are currently none) should be blocked on national security concerns, since such a deal would be deemed as further consolidation of the rare earth sector by China, which already controls 95% of global REE production.