Chinese private investment in Canada is poised to grow
Look for private enterprise to follow China's national oil companies
It is a known story by now that China has chosen Canada as one of its most favored destinations for investment. In less than three years, Chinese national oil companies (NOCs) such as PetroChina, Sinopec and CNOOC, as well as the China Investment Corporation, the country’s $300 billion sovereign wealth fund, have put some $16 billion into Canada’s energy sector alone, most of it in Alberta.
Much of this investment has been facilitated by a positive Canada-China relationship. Prime Minister Stephen Harper made his second visit to China early this year, followed by multiple ministers and provincial premiers and other municipal and business delegations. A Joint Working Group between Natural Resources Canada and China’s National Energy Administration recently met in Ottawa and in Calgary, where Canadian officials and senior energy executives discussed policy co-ordination and co-operation with their Chinese counterparts.
Chinese NOCs are establishing themselves and will continue to invest in Canada, but they are only one side of this story. There are indications that investment interests from China’s private sector have taken a shine to Canada, too. Compared to the NOCs, Chinese private investment in Canada is relatively small, but several factors suggest that could change.
First, China’s domestic energy market remains the domain of NOCs. Despite limited and incremental reforms in the energy sector, the state-run companies maintain a monopoly position in production, transportation, retail and service in the domestic market. That leaves limited space for the private enterprises to expand; they must go abroad for investment and other commercial ventures.
Second, there is a large and growing accumulation of domestic private capital. Many international-minded investors now seek returns beyond China’s national borders. While China’s foreign reserve (now standing at $3.3 trillion) continues to mount, conservative estimates put China’s domestic savings at about $17 trillion to $18 trillion by 2020. If only five per cent of that amount is designated for foreign investment, China may have some $800 billion to invest abroad. And if most of China’s FDI in tangible assets follow the current resource-seeking pattern, Canada should receive a significant portion of Chinese capital.
Third, more and more private enterprises in China see Canada as a haven for energy and resource investment. That’s largely because the results of Chinese private investment in Africa and the Middle East have been mixed. Financial and political volatility have forced a recalibration among Chinese investors, many of whom were hurt by the global downturn and yo-yoing commodity prices. A gold-rush mentality has yielded to sober assessments of political and commercial risks in these regions, while at the same time raising Canada’s profile as a place to invest.
Who, then, are these Chinese private investors? The first group is oil and gas distributors who need to secure future supply. These enterprises compete with NOCs for the domestic market. They are building infrastructure – from oil and liquefied natural gas terminals to pipelines to residential distributions – and like Canada for its upstream assets.
The second group is China’s mighty petrochemical producers. They have become dominant in the industry with a growing global market share. But they do not have enough feedstock to sustain their ambitious expansion plans. So they want to come to Canada for the upper chain of their production line: upstream reserves, supplies of oil and gas and refineries.
The third group is comprised of those who have made considerable profits in manufacturing, real estate or other sectors and are now looking to diversify their investments. They regard Canada as a key energy supplier to many of China’s large and rapidly expanding urban centers.
Private equity and investment companies represent another group. Many of them funnel funds from Chinese NOCs, SOEs or banks, and in the current low stock- and gas-price environment, Canadian companies and other energy assets are seen as appealing investments.
Chinese NOCs will continue to dominate the M&A scene in Canada’s energy sector in the coming months and years. But it’s time for the Canadian private sector, the relevant government agencies and the general public to prepare for the coming wave of Chinese private sector investment, which may display a different set of characteristics than that of Chinese NOCs.