Canada’s policy stance restricting takeovers by Chinese state-owned enterprises (SOE’s) is too restrictive and will hinder future investment between the two countries, says a paper by The School of Public Policy.

The federal government has overreacted to the threat posed by Chinese investment, concludes author Wendy Dobson.

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“The government’s enhanced stringency may be a response to popular fears that China is buying up Canadian assets,” Dobson says. “Such fears are, for the time being at least, overblown: China’s global outward [foreign direct investment] stocks are still lower than Canada’s, and a fraction of those held by the U.S., the U.K. and Germany — although China will undoubtedly continue to expand its foreign investment portfolio.”

Following the Nexen-CNOOC deal, Prime Minister Stephen Harper announced that moving forward similar deals would only be approved under “exceptional circumstance.” While this is ambiguous, Dobson argues that the government’s actions reflect a closed-door policy towards China at a time where openness is required. China’s own regulators are becoming more market-oriented.

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“Rather than focusing on ownership of investing firms, Canadian regulators should monitor their behaviour to ensure standards are met for safety, environment, labour laws, transparency and national security,” she says. “Closing off Canadian companies to Chinese bidders can hurt Canada’s economy. It could increase risk for, and discourage, private-equity investors who often see foreign takeovers as a possible exit strategy, while potentially sheltering poorly managed firms from takeovers, dragging down overall economic efficiency.”

Canada stands to lose from shutting out Chinese investment in the oil sands. Some estimates indicate that to achieve full development, the oil sands will require $100 billion in capital investment to 2019.

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“Currently, Chinese investment accounts for roughly two per cent of Canada’s total FDI stocks. Even if that share remained constant, by 2020 investment would total $40 billion or 40% of the estimated funding required to develop the oil sands,” Dobson said.

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