U.S. suspicion of Chinese investment an opportunity for Canada
Chinese companies are on a foreign buying spree.
For example, Chinese companies have recently made takeover offers for Ingram Micro Inc., a U.S.-based technology products distributor, Syngenta, an agricultural seeds manufacturer based in Switzerland, and U.S.-based General Electric’s appliance division. The flow of outward direct investment from China is strong and likely to accelerate in the future, as the domestic growth rate of China’s economy slows and as Chinese companies acquire the managerial and other skills needed to manage overseas assets efficiently.
The problem facing Chinese multinational companies is that their investment is viewed with suspicion by foreign governments, perhaps most so in the case of the U.S. government. In recent years, a number of attempted acquisitions of U.S. technology companies by Chinese multinationals have been rejected by the U.S. government on national security grounds. Given the military rivalry between the two countries, Chinese companies face a particularly hard challenge getting proposed acquisitions of U.S. companies approved by the Congressional Committee on Foreign Investment in the United States (CFIUS), which advises the president. Even the proposed acquisitions cited above, which do not involve takeovers of defense-related companies, will meet with tight scrutiny. China’s build-up of military bases on islands in the South China Sea is fuelling tensions between the two countries, and some leading candidates for the presidential election in November have taken an openly hostile position towards easing trade and investment relations with China. In short, there is no welcome mat out for Chinese investment in the United States.
A hostile U.S. attitude towards Chinese outward direct investment represents an opportunity for Canada, since a base in Canada would provide Chinese companies with duty-free access to the U.S. under NAFTA.
To be sure, the previous Canadian government tightened the review procedures under the Investment Canada Act for takeovers of Canadian companies by state-owned enterprises (SOEs), particularly for takeovers of Canadian oilsands firms. This tightening de facto especially applied to investments from China where many outward-investing companies are SOEs. It might be an appropriate time for the current Canadian government to review its policies towards takeovers of Canadian companies by SOEs.
First and perhaps foremost, the conceptual arguments against allowing takeovers by SOEs are dubious. The share price premium typically paid by foreign acquirers represents a wealth-gain for Canadian shareholders of the acquired company. Limiting the firms that can bid for Canadian companies could result in lower takeover premiums realized by Canadian shareholders, especially when a large potential bidder such as China is restricted from making takeover bids. Reduced prospects for being taken over and smaller expected takeover premiums may, in turn, discourage entrepreneurs from starting new companies in Canada, at least at the margin.
In short, there are potentially significant costs to discouraging investments by SOEs. The main concern about SOEs is that they will not act in a commercial manner and will be inefficient contributors to the economy. In this regard, ongoing reforms in China are promoting a stronger “market-orientation” among SOEs; however, even if SOEs pursue political rather than economic objectives, the costs of resulting inefficiencies will be borne largely by the owners of the SOEs.
A second reason for revisiting the amended policy toward SOEs is that Canada’s energy companies are increasingly in need of additional financing given the collapse of oil prices. China is a major source of financial capital over the foreseeable future. The lower Canadian dollar relative to the U.S. dollar and the hostile attitude of the U.S. towards Chinese investment are motivations for China to invest in financially troubled Canadian energy companies rather than U.S. companies, particularly given any indications that the price of oil has bottomed out.