Foreign Investment

China is increasingly extending its economic power and influence throughout the world.[1] This power is extended internationally in a variety of ways; however the focus of this paper will be on the impact of China’s sovereign wealth funds (SWF) and the willingness of Canada's corporation’s to accept this type of funding, specifically from the Chinese Investment Corporation (CIC). Two different companies within Canada, Teck Resources Ltd and Penn West Energy, will be commented upon and the benefits for China and Canada will be addressed. Upon analyzing the potential benefits, the focus will shift to the risks associated with these types of relationships and how China has become a global power with its investment strategy and the impact this has on centralizing global affairs.

China has three sovereign wealth funds in the top 10 SWF’s in the world.[2] CIC, which ranks sixth internationally,[3] has invested heavily into Teck Resources Ltd. and Penn West Energy. It has invested $817 million to take a 45% stake in an oil sands project owned by Penn West Trust,[4] and it also paid $435 million for a 5% interest in Penn West.[5] In addition to this, CIC holds 17% of B class shares at a cost of $1.74 billion, in Teck Resources.[6] Part of the attraction to Canadian companies has come from Canada’s healthy fiscal situation and robust economy.[7] Regardless of CIC’s rational for its investments, the financial commitment has enabled both Teck and Penn West to accelerate development[8] and help foster further collaboration between Canada and China.[9] In fact, Canada is considered to be second to only the U.S as an investment destination.[10]Therefore, the impact and importance of CIC and other SWF investing in Canadian enterprises is a positive step in terms of revenue generation and accelerated development.

CIC’s impact and importance to China is its ability to earn a return on its investment and thereby create a sustainable revenue stream that will fund economic development while placing it in a position of political power.[11] CIC may not publically acknowledge the political advantage of this type of action, but this fact is hard to dispute. Particularly when one looks to a relatively recent slogan within China which states;” Poverty is not socialism. To be rich is glorious”.[12] Clearly riches and political power are intended to go hand in hand in a communist society that has developed liberal tendencies. China has the extra capital to continue to support strong SWF’s and has no intention to limit its potential by backing away from opportunities that meet its criteria. Despite getting burnt in some of its early investments into the U.S financial industry, CIC continues to seek long-term, stable, sustainable, and risk adjusted returns.[13] Both Teck and Penn West met these criteria, and are expected to provide great returns for CIC.[14]

In Canada, the investments into Teck and Penn West must be viewed with caution. China has become a global power with its investment strategy and this has an impact on centralizing global affairs. This type of foreign investment strategy is not new, but could be detrimental to Canada if not handled carefully. For some in the U.S, China’s actions are seen as a threat to its sovereignty and have caused groups to call for revised policies to deal with SWF’s.[15] With investments worth $1.7 billion[16] being made by CIC into Canadian companies, the ability of Canada to reap all the rewards created in its state are drastically reduced. Initially when CIC first invested into Teck, Industry Canada did not deem it necessary to review the transaction under the Investment Canada Act.[17] However, Canada has recently adjusted the Act to single out investments made by foreign SWF in order to accommodate “national security” considerations.[18]

Canada has 175 billion barrels of oil in the ground; this amount is second to Saudi Arabia, and places Canada in a position that is attractive for SWF’s.[19] This suggests that Canada will likely create investment policies out of necessity for SWF’s as interest in its oil increases.[20] What makes this type of move difficult is the fact that CIC comes from a nation that does not operate by the same rules.[21] The problem that arises under this scenario is that there could be a redistribution of wealth to countries that are less firmly grounded in similar economic and political policies and it increases the role of these other governments to manage the wealth and economic power throughout the world.[22]

A common criticism of SWF in these countries is that these budget surpluses should be returned to the tax payers within the country in order to improve the quality of life.[23] These foreign governments, particularly China, are largely unaccountable to its own populous. With that in mind, what incentive does CIC have, aside from maintaining good international standing, to deviate from or improvise on their role as investor with Canadian companies?

According to top Chinese officials, the CIC was created to improve the rate of return on China’s $1.5 trillion in foreign exchange reserves and to soak up some of the nation’s excess financial liquidity.[24] Depending how it performs with this amount, more may be allocated for additional investments.[25] CIC’s investments in Teck and Penn West can then become viewed as footholds for China as it ascends to its position as global power. Can a balance be found between the world’s collective interest in sustaining the openness of capital markets and the legitimate national security concerns of host countries?[26] It has been suggested that the potential for controversy could be significantly reduced by a negotiated agreement among host governments addressing three key issues: (1) definitions, (2) risk assessment, and (3) dispute resolution.[27] Although much of this exists between CIC and the two Canadian companies,[28] the concern regarding Chinese political power in Canadian affairs remains. To complicate matters more, there has been allegations that SWF’s freedom to operate in Canada may stem from “agents of influence” with the provincial government.[29] This suggestion that key figures in Canada are under the influence of foreign powers is disconcerting, but should not come as a surprise. The opportunities that exist for Canada as a preferred country for China to invest in are great.

Some argue that government owned SWF, like CIC, do not pose a threat to national security.[30] In fact, they argue that the more SWF like CIC invest in Canada and other western nations, the higher the stakes will be for all parties for global economic prosperity and political stability.[31] This is certainly the sentiment coming from Penn West and Teck. Both companies are now able to accelerate their growth and increase their earnings exponentially.[32] Also, the actions of CIC increase the transparency for the strategic long range plans for China, while forcing global financial integration rather than protectionism.[33]

Regardless of how one views China’s changing role within the world and how this impacts Canada, it is undeniable that opportunities exist. China brings with the ability to accelerate growth and increase profits. The problem within this opportunity is how much power is Canada willing to give China, and what will be the long term impact of this on Canadians.

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Chinese Investment Corporation. November 7, 2010. http://www.china-inv.cn/cicen/ (accessed November 15, 2010).

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Davidson, Sinclair. "Should we worry about Sovereign Weathe Funds?" Policy, 2010.

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Foreign investment in Canada almost doubles in May. July 19, 2010. http://money.canoe.ca/money/business/canada/archives/2010/07/20100719-094655.html (accessed November 16, 2010).

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SWF Institute. 2010. http://www.swfinstitute.org/swf.php (accessed November 14, 2010).

Tonelson, Alan. U.S. - China Economic and Security Review Commission. February 7, 2008. http://www.uscc.gov/hearings/2008hearings/written_testimonies/08_02_07_wrts/08_02_07_tonelson_statement.php (accessed November 15, 2010).

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Vanderklippe, Nathan. The Globe and Mail. May 8, 2010. http://www.theglobeandmail.com/report-on-business/china-makes-billion-dollar-oil-patch-move/article1567524/ (accessed November 15, 2010).

[1] James A. Dorn. CATO Institute. August 7, 2003. http://www.cato.org/pub_display.php?pub_id=3206 (accessed November 13, 2010).

[2] SWF Institute. September 2010. http://www.swfinstitute.org/fund-rankings/ (accessed November 15, 2010).

[3]Ibid.

[4] Nathan Vanderklippe. The Globe and Mail. May 8, 2010. http://www.theglobeandmail.com/report-on-business/china-makes-billion-dollar-oil-patch-move/article1567524/ (accessed November 15, 2010).

[5]ibid

[6]Ibid.

[7] Foreign investment in Canada almost doubles in May. July 19, 2010. http://money.canoe.ca/money/business/canada/archives/2010/07/20100719-094655.html (accessed November 16, 2010).

[8] Market Wire. May 13, 2010. http://www.marketwire.com/press-release/Penn-West-Energy-Trust-China-Investment-Corporation-Announce-Strategic-Partnership-TSX-PWT.UN-1259607.htm (accessed November 15, 2010).

[9] Potter, Dr. Pitman. Asia Pacific Foundation. Septmeber 29, 2010. http://www.asiapacific.ca/sites/default/files/filefield/china-canada_senior_fellow_comment_sept_29_2010.pdf (accessed November 13, 2010).

[10] East Asia Forum. August 20, 2009. http://www.eastasiaforum.org/2009/08/20/china-inc-comes-to-canada/#more-6396 (accessed November 14, 2010).

[11] SWF Institute. 2010. http://www.swfinstitute.org/swf.php (accessed November 14, 2010).

[12] James A. Dorn. CATO Institute. August 7, 2003. http://www.cato.org/pub_display.php?pub_id=3206 (accessed November 13, 2010).

[13] Chinese Investment Corporation. November 7, 2010. http://www.china-inv.cn/cicen/ (accessed November 15, 2010).

[14] Market Wire. May 13, 2010. http://www.marketwire.com/press-release/Penn-West-Energy-Trust-China-Investment-Corporation-Announce-Strategic-Partnership-TSX-PWT.UN-1259607.htm (accessed November 15, 2010).

[15] Martin, Michael F. CRS Report for Congress, China's Sovereign Wealth Fund. January 22, 2008. http://www.uscc.gov/hearings/2008hearings/written_testimonies/08_02_07_wrts/08_02_07_tonelson_statement.php (accessed November 15, 2010).

[16] East Asia Forum. August 20, 2009. http://www.eastasiaforum.org/2009/08/20/china-inc-comes-to-canada/#more-6396 (accessed November 14, 2010).

[17] Ibid.

[18] Ibid.

[19] Ashby Monk. Oxford SWF Project. July 15, 2010. http://oxfordswfproject.com/2010/07/15/canada-oil-sands-swfs-and-spies/ (accessed November 13, 2010).

[20]Ibid.

[21]Ibid

[22] Edwin M Truman. Peterson Institute for International Economics. September 2010. http://www.piie.com/publications/briefs/truman4983.pdf (accessed November 15, 2010).

[23] Sinclair Davidson. "Should we worry about Sovereign Weathe Funds?" Policy, 2010.

[24] Martin, Michael F. CRS Report for Congress, China's Sovereign Wealth Fund. January 22, 2008. http://www.uscc.gov/hearings/2008hearings/written_testimonies/08_02_07_wrts/08_02_07_tonelson_statement.php (accessed November 15, 2010).

[25]Ibid

[26] Benjamin J Cohen. "Sovereign wealth funds and national security: The great tradeoff." International Affiars, 2009. Pg. 731.

[27]Ibid.

[28] Chinese Investment Corporation. November 7, 2010. http://www.china-inv.cn/cicen/ (accessed November 15, 2010).

[29] Ashby Monk. Oxford SWF Project. July 15, 2010. http://oxfordswfproject.com/2010/07/15/canada-oil-sands-swfs-and-spies/ (accessed November 13, 2010).

[30] Bahgat, Gawdat. "Sovereign wealth funds: dangers and opportunities." International Affairs, 2008. Pg 1204.

[31]Ibid.

[32] Market Wire. May 13, 2010. http://www.marketwire.com/press-release/Penn-West-Energy-Trust-China-Investment-Corporation-Announce-Strategic-Partnership-TSX-PWT.UN-1259607.htm (accessed November 15, 2010).

[33] Sir John Gieve. "Sovereign Wealth Funds and Global Imbalances." Quarterly Bulletin, 2008.