Chinese investment in Canada cut by nearly half as diplomatic spats, currency controls take toll

‘It suggests the heady days of Chinese investment are certainly over for now’

Chinese investment in Canada nearly halved in 2018, as Beijing’s restrictions on capital outflows combined with rising Western scrutiny of its state-owned firms and heightened diplomatic tensions to put a damper on its global dealmaking ambitions.

At 47 per cent, the drop in investment in Canadian firms was slightly deeper than the global decline, which came in at 40 per cent, according to new data from the Canada-China Investment Tracker, maintained by the University of Alberta’s China Institute. Total investment fell to $4.43 billion from $8.45 billion in 2017.

“What struck us was the sharpness of the decline, which was quite significant albeit somewhat in line with global figures,” said Gordon Houlden, a former Canadian diplomat and head of the institute. “It suggests the heady days of Chinese investment are certainly over for now.”

The slump — evident in nearly all the sectors that traditionally attract interest from Chinese firms — is partially the result of capital controls imposed by Beijing in 2016 and 2017. China is attempting to stabilize its currency — down 10 per cent at its weakest point last year — by preventing money from fleeing the country via overseas investments.

But a host of other factors are also likely at play, Houlden said, including Chinese investor caution due to poorly performing Canadian energy investments and an overall chill cast by a year of fraught relations between Ottawa and Beijing.

In May, Ottawa blocked the $1.51 billion takeover of the construction firm Aecon Group Inc. by a Chinese state-owned enterprise, citing national security concerns. The federal government is in the midst of another comprehensive national-security review on the involvement of Chinese telecom giant Huawei in Canada’s eventual 5G mobile network.

And Ottawa is locked in an escalating diplomatic row with Beijing over the detention of Huawei senior executive Meng Wanzhou, arrested in Vancouver on a U.S. extradition request — a move that was followed by the detentions of Canadian citizens in China.

The Huawei research and development centre in Dongguan in south China’s Guangdong province. AP Photo/Andy Wong

Though the Meng case is too recent to have had an impact on the investment data, the rising scrutiny of Chinese firms in Canada is likely to have already taken a toll on investment flows, Houlden said.

“In general I think there was a chilling effect due to investment turndowns that predate the Meng case,” he said. “Mergers and acquisitions are expensive, they are time consuming, there’s a lot of uncertainty, particularly in the case of China where security concerns are more likely to come into play. Do you really want to go through a year of litigation and then get turned down? Those things have a cumulative effect.”

Chinese investment in the information technology sector fell 94 per cent to $26 million in 2018 compared to a year earlier, according to the data. Health and biotechnology investment dropped to $5 million, a 95 per cent decline, while energy investment fell 84 per cent to $140 million.

Chinese firms have endured steep losses on Canadian oil and gas deals made during the energy boom. Indeed, the state-run CNOOC Ltd. paid $15.1 billion for Calgary oil producer Nexen Inc. in 2012 only to book significant losses due to low prices and operational problems. And other Chinese firms made bets on Canadian energy firms assuming that more pipeline capacity would be built in order to move their product to market.

The plunge in energy sector investment “is not just a China story,” but one that has affected a broad range of foreign investment, noted Doug Porter, chief economist at BMO Capital Markets.

“But the Nexen experience was less than ideal,” he said.

And while the current tensions over the Meng case may only play out for a month or two, when it comes to attracting Chinese investment, Porter added that “obviously the background is very challenging at this point.”

We are a storehouse of resources, we have an Arctic presence, there’s a whole range of reasons why in the long term China is going to want to deal with us.
former diplomat and head of University of Alberta’s China Institute Gordon Houlden

While down overall, Chinese investment in Canada’s metals and minerals sector spiked to $3.7 billion in 2018 from $264 million a year earlier — the highest level on record. The top deal in that sector saw China’s Zijin Mining Group Co. Ltd. pay $1.86 billion for B.C.’s Nevsun Resources Ltd.

Chinese interests in industrial and electronics equipment rose 11 per cent to $486 million. Investment in all other sectors declined.

Despite various points of friction over the past year, Canada has been attempting to build stronger links with China, as it endeavours to diversify trade flows away from the United States.

But any future trade and investment links with Beijing may ultimately depend on the outcome of ongoing trade talks between the world’s two economic superpowers.

“We are a storehouse of resources, we have an Arctic presence, there’s a whole range of reasons why in the long term China is going to want to deal with us,” Houlden said. “But our very prosperity relies on trade. One way or the other we are in a global boat and tightly tied to our U.S. partners, so that relationship impacts on us.”