China is preparing tostep up its investments in Canada with the opening of a Toronto officefor its deep-pocketed sovereign wealth fund, representing the firstpermanent foreign location for the state-backed institution.
China Investment Corp.(CIC), which has recently plowed billions of dollars into the Albertaoil sands and Canadian resource companies, will unveil plans for anoffice in Canada’s financial capital next week.
By choosing Toronto overother financial centres such as London and New York for its firstcorporate location outside of China, the $300-billion (U.S.) fund issignalling it plans to ramp up its Canadian holdings, particularly inthe resource sector.
“It is symbolically andsubstantively significant because its speaks of CIC taking Canada veryseriously and wanting to have a permanent presence here,” said DavidEmerson, a former federal trade and foreign affairs minister, who is amember of CIC’s international advisory council.
CIC’s top executive andchairman Lou Jiwei is expected to be in Toronto to mark the opening ofthe office. Felix Chee, a former executive with Manulife FinancialCorp., who serves as a special adviser to Mr. Lou, is expected to play akey role in CIC’s new Canadian operations.
CIC has sought to keepits decision to open the Toronto office out of the limelight because anumber of politicians, bankers and business people in the United Stateshave been lobbying for it to open an office south of the border.
“This is a huge coup forCanada and for the City of Toronto,” said Manulife Financial Corp.chief executive officer Don Guloien. “It's a great tribute to theinvestment possibilities that CIC sees in Canada.”
With the mandate ofinvesting a sizable portion of China’s $2.85-trillion worth of foreignexchange reserves, CIC has attempted to portray itself as a passiveinstitutional investor focused on returns, not boosting stateinfluence. Yet investments in Canadian companies by state-backedentities such as CIC continue to concern some Canadians who are wary ofChina’s government gaining sway over domestic assets and corporations.According to the Asia-Pacific Foundation of Canada, only 18 per centof Canadians are in favour of a Chinese state-owned company buying acontrolling interest in a Canadian company.
Mr. Emerson said CIC’snew Canadian presence recognizes that foreign direct investment bysovereign wealth funds remains “a little bit” controversial.
“You need to be on site to understand people’s issues and concerns,” he said.
"Canada has a goodrelationship with China that has continuously improved since we tookgovernment," Finance Minister Jim Flaherty said in an emailed statementWednesday. "I've visited China three times as federal Finance Ministerand in my last visit in 2010, I discussed the mutual benefits such aninitiative would yield to both our countries. I am pleased that theChina Investment Corp. has chosen Toronto to locate its North Americanheadquarters."
CIC came to the rescueof a debt-laden Teck Resources in 2009, investing $1.5-billion for a17-per-cent equity interest in the Vancouver mining firm. That deal haspaid off handsomely for the Chinese fund, which disclosed last yearthat its Teck holdings were worth $3.5-billion. CIC was also recentlygranted a seat on Teck’s board of directors.
Last year, CIC paid$817-million (Canadian) for a 45-per-cent stake in an Alberta oil sandsproject owned by Penn West Energy Trust, and $435-million for a5-per-cent interest in the company. The fund has also disclosed smallstakes in Potash Corp. of Saskatchewan Inc. and Kinross Gold Corp.
During an interview in October, CIC president Gao Xiqing spoke at length about his desire to do more deals in Canada.
“There are countrieswith comparable economic characteristics to Canada, but with a lot lessfriendly environment,” Mr. Gao said. “In our dealings with theCanadian government, various parts of the government, with the businesspeople, we feel that it’s a lot more congenial to our investments.”
A number of bankers saythat they are expecting an increase in investments by Chinese firms andinvestors in Canada over the coming months.
Adam Waterous, globalhead of investment banking at Scotia Capital, predicts that there willbe a series of oil and natural gas deals in Canada this year, and thatmany of those might have Chinese involvement.
“We expect Asianinterest in conventional-operated oil and gas companies and assets inCanada to be substantially higher than in the past,” he said.
And he disagrees withthe idea that Ottawa’s decision to block an attempted takeover ofPotash Corp. by Australian mining conglomerate BHP Billiton will coolinterest from China for Canadian resource deals.
“There will be certainvery large oil and gas companies that may have been on their radarscreens which no longer will be, but that’s just a handful, it’s a verysmall number,” he said. “I don’t think there’s a perception thatCanada’s closed the door on foreign investment. In fact, I actuallythink that the government will be potentially even more accommodatingon some of the smaller transactions because there’s potentially a viewthat they want to be seen as still welcoming foreign investment.”
A large part of thereason the office is in Toronto is to accommodate Mr. Chee, who hasbecome invaluable to CIC, said one person who deals frequently withCIC. Another factor is the location of various Canadian pension plans,with which CIC is striking up successful working partnerships.
“We look forward toworking with them more closely,” said Mark Wiseman, executivevice-president of investments at the Canada Pension Plan InvestmentBoard. “We have a good relationship with them. Our office in Hong Konginteracts with them regularly, and them having an office in Torontowill, we think, in the long run further our ability to partner withthem in Asia, and for them to partner with us in North America.”
The new office is also asymbol of a strengthening relationship that has developed between theCanadian and Chinese business communities.
“We’ve really seen therelations on an upswing, particularly the investment file,” said SarahKutulakos, executive director of the Canada China Business Council.“Back in 2007 and 2008, Chinese companies were telling us ‘we hear yousaying you’are open for business, but we really need to see proof.’ In2009 and 2010, there was a lovely increase in investments both in termsof size and scale, and several of them were CIC.”