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Friday, January 6, 2017
Why Canada should open its arms to Chinese investment
Sarah Kutulakos is the executive director of the Canada China Business Council
Defying gloomy predictions, China’s Ministry of Commerce reported in November that China’s non-financial foreign direct investment rose by more than 50 per cent to the end of August, 2016. Although subsequent announcements followed that China may reduce investment outflows, the investment wave is undeniable. And Canada’s small and narrow share appears to be diversifying.
More surprising is where these investment flows are now directed. Contrary to some media reports, this is not “hot money” seeking a safe harbour. These are strategic investments in the core businesses of the Chinese investors’ companies. According to Rhodium Group, an expert consultancy on the Chinese economy, more than 80 per cent of investment in the United States was focused on sectors such as automotive, consumer goods, technology and entertainment.
China’s accelerating transformation from a heavy capital-investment and manufacturing export-driven economy, to one increasingly built on services and consumption, means companies need new and different skills.
The rapidly growing service sector is prompting investors to seek the best Western expertise and systems to meet rising consumer demand and quality expectations at home. Whether the “best-in-class” is in Israel, Italy, the Silicon Valley or Waterloo, Ont., these investors actively seek new partners and acquisition targets. They need this talent and tech expertise for diversification, for returns on capital and to continue to move up the global industrial food chain.
A recent TD Economics report highlighted how China’s service sector has evolved, doubling from 25 per cent of GDP 25 years ago to more than 50 per cent today. That is a pace that would put China very close to the 70-per-cent service/goods split in advanced economies, in little more than a decade. Hitting China’s growth targets means services are the key to future socio-economic stability.
Canada represented only 2 per cent of China’s outbound investment in 2015. In commercial real estate – a fast-growing investment sector aimed at low-risk, stable profits in diversified markets – Canada didn’t even rank in the top 10 destinations in 2015, according to DTZ/Cushman & Wakefield. Instead of hand-wringing about whether we should welcome more Chinese investment, our children should be asking, “Why aren’t we attracting a larger share?” Their futures will depend on it.
Beneath the radar, however, there are signs that our share is growing and diversifying. On a single-transaction basis, the sums are usually smaller than the large resources deals of the last decade, but cumulatively they may soon be larger and of more value to Canadians.
Take the example of Fosun Group, whose stated mission is to focus on the world’s “wealth, health and happiness ecosystem.” Its 20-per-cent stake in Cirque du Soleil certainly falls into the “happiness” category. Later this year, its global premiere of the Cirque’s version of Avatar is going to put this Canadian cultural export champion on an even higher plateau that it has ever before achieved.
As Chinese investors have gained experience, they understand that their goal should be sustaining or building the investment target’s business, not seeking to change the culture or the firm’s foundations. Increasingly, Chinese majority investors provide long-term, patient capital. They are less interested in dramatic changes in the business, or a fast exit; rather, they choose to work with the Canadian investee to grow organically, to innovate and to build on established strengths.
A good example is BlueFocus Communications, which holds a majority stake in Vision7 International, the parent of Cossette Inc., a Quebec-based Canadian advertising and PR champion. In late 2016, Cossette won the Canadian Marketing Association’s “Best of the Best” and “Agency of the Year” awards, a tangible proof of the wisdom of their Chinese owners’ investment approach.
Year after year, we see an increasing number of similar stories. Investors come here for the benefits Canada offers, understanding they must operate in full compliance with our laws, customs and regulations. In many cases, Canadian values and business culture inform and shape these investors’ approach to the global systems they are building, as they seek to become strong international corporations.
Canada was built in the 19th century on British investment and in the past century with American partners. We are beginning to see the deepening and broadening of that same pattern of global partnerships with increasing numbers of Chinese investors. It’s a path to a secure Canadian economic future that we should surely welcome.