Bloomberg News

Harper Seeks China Access for Canada Finance With Oil as Lever

February 14, 2012

Feb. 7 (Bloomberg) -- Prime Minister Stephen Harper is carrying a big bargaining chip as he tries to open Chinese markets for companies such as Manulife Financial Corp. - access to Canadian oil.

Harper is leading a delegation of more than 40 Canadian executives on a four-day visit to China beginning tomorrow. While he may try to assure President Hu Jintao he’ll encourage oil shipments to Asia and welcome Chinese investment in Canada’s energy industry, Harper will also push for greater access for banks, insurers and companies such as Bombardier Inc., a Montreal-based plane and train manufacturer.

“If you are going to open up Canada or Canadian resources to Chinese investment, there’s going to have to be some show of reciprocity on the other side,” said David Emerson, a former trade minister under Harper.

Economic ties between China and Canada, which holds the world’s third largest oil reserves, have been lopsided and meager on investment. Canadian direct investment in China was C$4.8 billion ($4.8 billion) in 2010, less than 1 percent of Canada’s total, and about one-third the level of investment in Canada by Chinese firms, Statistics Canada data show. With 99 percent of oil exports going to the U.S., Canada’s trade deficit with China was C$147.5 billion from 2006 to 2010, Industry Canada says.

The trip will be Harper’s second to China since his Conservatives took power in 2006. Harper, who last month called diversifying Canada’s energy exports a “national priority,” is aiming to reduce the country’s reliance on the U.S., after President Barack Obama rejected TransCanada Corp.’s $7 billion Keystone XL pipeline to ship Canadian oil to the Gulf Coast.

Meetings in Beijing

Harper will meet Chinese Premier Wen Jiabao Feb. 8 in Beijing and President Hu Jintao the next day, as well as vice premier Li Keqiang.

Spokesman Andrew MacDougall said that Harper will have an opportunity to raise “market access issues” that some Canadian companies are having, citing banks as an example.

“It’s evident right now the two countries do have clear interests,” MacDougall told reporters. “We can meet each other’s needs in a number of various areas and that’s not just energy.”

John Manley, head of Canada’s Council of Chief Executives, said in a Nov. 21 speech in Beijing that China should ease restrictions in sectors such as financial services and mining.

“This lack of openness is an obvious source of frustration for Canadian investors, particularly given the recent dramatic increase in Chinese investment in Canada,” Manley said. “Canadian investors ought to be afforded the same access to China that Chinese investors are afforded.”

‘State Capitalism’

China has also faced criticism from the U.S. and the European Union for protecting state-owned enterprises and domestic industry, prompting U.S. Ambassador to China Gary Locke to accuse it last year of “embracing state capitalism more strongly each year.”

Relations between Canada and China cooled in 2006 after Harper criticized China’s human-rights record, telling reporters that promoting trade shouldn’t require the government “to sell out important Canadian values.” A year later, new foreign investment rules, which put additional scrutiny on state-owned entities, raised questions about whether Canada was targeting China. Harper then chose to skip the 2008 Beijing Olympics.

The relationship began to improve in 2009 with trips to China by Canadian government officials including Finance Minister Jim Flaherty, Bank of Canada Governor Mark Carney and chief bank regulator Julie Dickson, to promote the country’s banks and insurers.

Joint Ventures

Canadian financial institutions have tried to expand in Asia’s largest economy, with investment mainly limited to joint ventures and minority stakes, such as Bank of Nova Scotia’s C$719 million purchase of 20 percent of Bank of Guangzhou.

The bank bought a minority stake in Xi’an City commercial bank with International Finance Corp. in 2004, which grew to 14.8 percent in 2009. At the end of 2011, Scotiabank increased its stake further to 18.1 percent.

“We continue to see a lot of potential in China given the size and age of the population here,” said Michelle Kwok, the lender’s senior vice president of Asia Pacific and Middle East, who will be part of the Canadian delegation.

“It behooves them to try to get in there as the middle class is starting to get a little bit more sophisticated on its savings,” said John Aiken, a bank and insurance analyst at Barclays Capital in Toronto. “In a perfect world, I’m fairly certain that they’d love to go in, set up their own proprietary shop and grow from there but the nature of China, the regulators, they preclude them from doing such.”

Executives in Delegation

Harper’s delegation will include Patrick Daniel, head of Enbridge Inc., the pipeline company that plans to build a link between Alberta’s oil reserves and the Pacific coast; Tim Gitzel, chief executive of Cameco Corp., the world’s largest uranium producer and Marcel Coutu, chief executive officer of Canadian Oil Sands Ltd., which holds a stake in the Syncrude oil venture along with China Petrochemical Corp.; as well as executives from Scotiabank and Manulife.

“We are pleased that Prime Minister Stephen Harper will be visiting China and believe this visit will be warmly received,” Manulife CEO Donald Guloien, who was on Flaherty’s 2009 trip to China, said in an e-mail. “We know firsthand, through our experience with our two Chinese joint ventures, the importance of relationships.”

Canada has lagged behind other countries in developing trade links with Asia, and hasn’t signed a free trade agreement with any country in the region. Canadian exports to China totaled 1.8 percent of shipments abroad in 2006. That figure has since risen to 3.7 percent through the first 11 months of 2011, according to Industry Canada.

Investor-Protection Agreement

Aside from building opportunities for Canadian firms, Harper may try to make progress on an agreement to increase legal protection for companies in disputes with Chinese businesses. The two countries have been in talks on an investment-protection pact. Emerson, who was trade minister under Harper between 2006 and 2008 and is now a member of the international advisory board of China Investment Corp., China’s sovereign wealth fund, said concluding the agreement on this trip would be a “home run” for Harper.

Harper will also focus on the need for intellectual property protection and developing a process to resolve investment disputes, Emerson said. As well, two countries may consider developing a deeper “economic framework” agreement that could cover regulatory and other barriers to trade and can focus on specific sectors, he said.

“You want to be good to your friends and allies but you are going to require some reciprocation,” said Emerson.

--Editors: Paul Badertscher, David Scanlan

To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net; Sean Pasternak in Toronto at spasternak@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net


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