China has a new ambassador to Canada, Luo Zhaohui, an experienced Foreign Ministry official but one with little previous exposure to Canada. Mr. Luo, 52, an up and comer in the Chinese foreign service (his previous assignment was as Director-General for Asian Affairs), has been tasked with getting the relationship with Canada back on track. His “to do” list was made clear in an interview he gave to the Beijing correspondent of Canada’s national paper, The Globe and Mail. (The Globe has maintained a Bureau in Beijing for more than 50 years, through good years and bad.) In a wide-ranging interview, Luo urged greater political engagement by Canadian leaders with China, complained about restrictive new foreign investment rules that have curtailed investment by Chinese State Owned Enterprises (SOEs) in the Canadian energy sector, asked why Canada has not yet ratified the Foreign Investment Promotion and Protection Agreement that it signed with China in 2012 (China has completed ratification procedures on its side) and reiterated China’s interest in negotiating a bilateral free trade agreement with Canada. There has been little interest on the Canadian side after the two countries completed an Economic Complementarities Study two years ago that outlined areas of potential benefit for both sides in negotiating such an agreement. Finally, he indicated China was ready to purchase more from Canada (it is running a sizeable trade surplus) and that senior Chinese leaders were disposed to accept an invitation to visit Canada.
Luo’s comments echoed statements by his outgoing predecessor, Zhang Junsai, who indicated just prior to leaving Ottawa for China, and retirement, that his “only regret” was that the bilateral investment agreement had not been implemented during his tenure.
Zhang’s “regrets” may involve more than just an uncompleted investment agreement. China is on the hunt for resources and Canada has been seen as a secure and stable source of supply. After Canada approved the $15 billion takeover of Canadian oil company, Nexen, by China National Offshore Oil Corporation (CNOOC) in December 2012, but with caveats that made it clear that any such future investment would not be approved barring unspecified exceptional circumstances, Chinese investment in Canada has plummeted. From investment of over $21 billion in 2012 (admittedly inflated because of the Nexen takeover), Chinese investment totaled just $220 million in 2013, a source of angst for Canada’s energy sector, which needs huge investments of capital to develop its oil and gas capabilities. There has been considerable criticism in Canada of the mixed signals the Harper government has been sending to China regarding its openness to Chinese investment.
Several reasons have been advanced for this ambivalent attitude. There have been reports of a split within the Cabinet over how fast to develop closer economic and political relations with China, with some in the Cabinet expressing concerns regarding Chinese cyber-espionage as well as human rights issues in China. Canadian public opinion remains wary of developing closer ties with China, according to polling by the Asia Pacific Foundation of Canada. Its most recent National Opinion Poll: Canadian Views on Asia showed that Canadian support for Asian investment in Canada has weakened, particularly for SOE investment from China. Thus, there is a degree of political risk for the governing Conservative Party of Canada in being seen as too eager to embrace China, despite urgings from the influential business constituency to reassure China that more investment is welcome.
In light of these negative attitudes toward direct investment from China–and there are similar echoes in the US dating back to the blocked Unocal takeover by CNOOC in 2005–what are the prospects for increased Chinese investment in Canada and the US? Interestingly, while Canada has been applying the brakes, Chinese investment in the US has been increasing, although it is not without controversy. What is significant is that the percentage of Chinese investment in the US coming from non-state owned companies is now in excess of 70 percent. Rightly or wrongly, it seems to be the perception of a monolithic China exemplified by SOE investment abroad that has caused public and political concern in Canada and the US. It has been widely argued that those SOEs that are engaged internationally operate (largely) according to market principles and are driven by turning a profit rather than by China’s strategic objectives. The argument has also been made that SOEs operating in the US, Canada or elsewhere are subject to national laws in the same way that a private corporation comes under local laws and regulations. Nonetheless, there is unease about the role of SOEs and if Chinese investment continues to expand, it will be important for private Chinese investors to take the lead. That said, in sectors like mining and energy, Chinese SOEs will necessarily continue to play a lead role until the economic reforms introduced by the Third Plenum fully take effect.
In the meantime, Chinese companies active abroad can be more pro-active in terms of securing a more welcoming environment in the locations where they wish to invest. As Ambassador Luo noted in his interview with The Globe and Mail, China has its own role to play, and he called on Chinese firms to conduct more “charity work, community engagement and media engagement.” While most Western companies would eschew the term “charity work”, all successful companies invest in the communities in which they are based and foster positive relationships with local stakeholders. Chinese companies do not have a tradition of doing this, even less so for SOEs, and if they are to adapt and become truly international companies, this is an aspect of their business that will need attention, particularly in North America.
Chinese entrepreneurs have shown great ingenuity and determination in building enterprises that have expanded internationally. Jack Ma’s Alibaba is a perfect example. What is needed now is for more Chinese entrepreneurs, and particularly the somewhat cumbersome and centrally managed SOEs, to embrace international practices and norms that will make them more politically acceptable to political leaders abroad. If they can do this, political leaders such as Prime Minister Harper in Canada, will be better able to manage the economic, political and ideological interests in play, and open the door to more Chinese investment, for the benefit of both Chinese business interests and host economies. Ambassador Luo will have achieved his objectives.
Hugh Stephens is an Executive-in-Residence at the Asia Pacific Foundation of Canada and a Fellow at the Canadian Defense and Foreign Affairs Institute.