Report Warns Canada's Rules Could Dissuade Investment by China

Report Warns Canada's Rules Could Dissuade Investment by China

OTTAWA - Canadian rules governing foreign takeovers and investment are dissuading China from deploying more cash in the country's resource sector, warned a report released Thursday by a nonpartisan think tank.

China invested $14.1 billion Canadian dollars ($13.9 billion) in Canada in 2010, half of that in the resource sector. But the amount from state-owned Chinese companies like Sinopec Group, China National Petroleum Corp. and CNOOC Ltd. could escalate if there was less political risk associated with Canada's foreign-investment approval process, Ottawa's Conference Board of Canada said in its analysis.

Under the Investment Canada Act, all foreign investments or takeovers valued at over C$330 million require government review, and approval is only granted if officials conclude the transaction amounts to a "net benefit" to the country. However, the law doesn't spell out what hurdles foreigners need to clear.

The Conservative government has tinkered this year with the country's foreign-investment rules, announcing it would raise the minimum threshold that triggers a federal review to C$1 billion over a four-year period, and disclose more details about why the government would opt to block a particular foreign takeover or investment.

But those changes, critics have argued, don't provide much more clarity, nor do they set out clear parameters about what foreign investments are allowed under the Investment Canada Act, something the government promised in 2010 after it rejected BHP Billiton Ltd.'s attempt to acquire Potash Corp. of Saskatchewan.

"Prospective foreign investors are left to improvise deals that might satisfy the government of the day. This hardly seems like a rational way for a modern country to encourage foreign investment," the board said in its report. "This issue is all the more relevant to China because, by definition, virtually all major Chinese investments are politically sensitive. Therefore, Chinese investors are at particular risk under a legislative framework that relies heavily on political judgments versus clear rules."

"We conclude that the current regime is most definitely a barrier to Chinese investment," the board said.

Canada's Industry Minister, Christian Paradis, is in charge of enforcing the country's foreign-investment rules. Through a spokeswoman, the minister said a recent investment agreement signed earlier this year by the governments of Canada and China provided Chinese firms with the "predictable" rules they need to invest "with confidence."

Mr. Paradis added Canada's foreign-investment review process "is sound and encourages investment, economic growth and prosperity in Canada."

The Conference Board's advice to clear up foreign-investment rules in an effort to attract more Chinese investment comes as Canada's Conservative government, led by Prime Minister Stephen Harper, makes a big push to boost energy exports to China and the rest of Asia, following White House-dictated delays on building the Keystone XL pipeline project.

To date, Chinese companies have opted to take minority stakes in Canadian energy projects to avoid political backlash, though in rare cases they have taken large, majority interests--such as with CNOOC's purchase of OPTI Canada last year. The Conference Board noted Chinese capital investment in Canada is only about a third of that in Australia, which shares similar economic characteristics to Canada.

The report recommended, among other things, that the Canadian government set out clear net-benefit tests for foreigners to meet, and that they be applied in a way that forces Canadian officials to detail why a particular offshore investment is contrary to the public interest.


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