By All Means Necessary (20 page)

Opponents marshaled a range of arguments. Malcolm Turnbull, the leader of Australia's Liberal (right-of-center) opposition at the time of the attempted investment, led the case against Chinalco on the basis of sovereignty. He warned that the Chinalco-Rio Tinto deal involved “direct management involvement and a high level of influence right down at the operating level of Rio's most important assets.”
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The National Party's Senator Barnaby Joyce, a prominent conservative populist, recorded at least one television advertisement with a simple one-sentence message: “Stop the Rudd [Labor] Government from selling Australia.”
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Others focused on human rights. In a
Sydney Morning Herald
column, Peter Costello, the former federal treasurer and a Liberal parliamentarian, expressed dismay over the Chinese government's ability to control Australia's resources, and he channeled broader concerns over Chinese government policies: “In China, ” he wrote, “you do business with state-owned enterprises subject to political control in a country that does not tolerate political opposition, or a critical press.”
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Those disposed against the deal had a third source of support: BHP Billiton. The Australian mining giant reportedly lobbied strongly behind the scenes to persuade Prime Minister Kevin Rudd and several top cabinet officials that the deal would cede Australian sovereignty to China.
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At the same time, a public offer from BHP to team up with Rio Tinto in developing its iron ore assets promised to help Rio Tinto address the debt challenges that had at least partly motivated its interest in the Chinalco investment in the first place. This made the proposed Chinalco deal appear less appealing to Rio Tinto shareholders.
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The combination of public concern and changing commercial conditions came to a head on June 4, 2009. Faced with waning interest from shareholders and uncertainty surrounding FIRB approval, Rio Tinto announced it would not accept the Chinalco offer, incurring $200 million in breakup fees as a result.
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In the wake of the collapse, a poll of Australians confirmed ongoing concerns. Respondents reported they were uneasy with specific Chinese investments in Australia's resources. Fifty-two percent of respondents were “uncomfortable” about the fact that China “is or will become the leading power in Asia.”
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Half of those polled believed the country was “allowing too much investment from China, ” compared to 42 percent who believed Australia was allowing the “right amount of investment” from the SOEs.
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Many respondents held these views despite believing that China was economically important to Australia; a total of 63 percent of those polled described China as the economy “most important” to Australia.
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A repeat of the same poll a year later showed declining support for Chinese investments: now 57 percent thought the government was “allowing too much investment from China” and only 34 percent thought the level of investment was appropriate.
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Nonetheless, strong Chinese investment in Australia continued, with multiple billion-dollar-plus deals in 2011 and 2012.
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Over the last decade, Canadian growth has been buoyed by high global resource demand, following a pattern similar to Australia's. In 2011, oil, gas, and mining made up nearly 5 percent of the Canadian economy, while agriculture, forestry, fishing, and hunting contributed another 2 percent.
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These figures do not include jobs up the supply chain (producing equipment and materials for resource development) or those spurred by spending of resource wealth, both of which are often larger than direct employment.

China has been a major driver of this change. In 2009, as U.S. demand declined amid recession, China passed the United States as the top buyer of Canadian ores, purchasing 24 percent (by
value) to 13 percent for the United States.
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China has retained the top position since then, on the back of strong sales of iron ore and copper, with its share in Canadian exports reaching 33 percent by 2011.
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Chinese purchases of Canadian timber have lagged, but in 2010 China surged ahead of the United States and in 2011 became the buyer of nearly half the raw timber Canada exported.
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This direct trade relationship has parallels to the China-Australia one, though without the massive market shares characteristic of the Chinese role in Australia's export economy.

In other areas, though, the Chinese role has been less direct. Canadian energy production has boomed on the back of high prices, and those high prices would almost certainly not have prevailed if not for Chinese demand. Yet China plays a tiny role as a buyer of Canadian oil, gas, and coal, taking a mere 1 percent of the country's product (mostly coal) as of 2011.

Chinese direct investment has largely lagged but recently came to the forefront. The first overseas investment by a Chinese oil company was actually in Canada, not Africa or Latin America.
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Accounts vary, but in 1992 or 1993 CNPC acquired development rights in the North Twing oilfield, and in 1993, the field produced China's first barrel of overseas oil.
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Three more small oil investments followed in as many years. But then, as Chinese companies intensified their overseas investments, Canada was left behind. There was no significant Chinese investment in Canadian energy or minerals between 1996 and 2004.
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This trend reversed course beginning in 2005 with the acquisition of a 17 percent stake in MEG Energy, an Alberta oil sands producer, by CNOOC for $130 million.
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This was quickly followed the same year by Sinopec's purchase of 40 percent of Synenco, another oil sands company, for $120 million. Chinese investment in the oil sands continued to grow, and in August 2009 CNPC made the first Chinese investment in Canadian oil of more than one billion dollars, buying a controlling stake in Athabasca Oil Sands Corporation for $1.74 billion.

Investment in mines started more slowly and has trailed investment in energy. (Agriculture and forestry investment is essentially
absent, and although there is debate over whether it may accelerate in the future, few are confident it will.)
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In October 2006, Jiangxi Copper, a state-owned enterprise and the largest copper producer in China, bought a controlling stake in bcMetals for $110 million.
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Chinese minerals investment paused until 2009, and then reemerged. That year saw nearly $2 billion of investment, including the purchase of 20 percent of Teck Resources, one of the largest mining companies in Canada, by the sovereign wealth fund China Investment Corporation (CIC). Metals investment in each of the next two years measured in the hundreds of millions. This remains a small part of the $22 billion that flowed from abroad into Canadian energy and minerals in 2011.
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With the growing scale of resource production and Chinese investment has come controversy. The Canadian government has tried to stay away from debates over how it should treat Chinese investment, and whether it should be handled any differently from other foreign investment in the country. Just as the Australian debate was pushed into the spotlight by Chinalco's bid for Rio Tinto, however, CNOOC's attempt to buy Nexen in 2012 forced Canada to confront its ambivalence about Chinese investment.

The Canadian economy rode high for most of the previous decade on the back of strong world prices for the commodities it produced. This also made it the target for a large number of successful foreign investments, including from Chinese firms. Yet no Chinese investment met with significant resistance or encountered intense scrutiny from the Canadian federal government. Indeed, Canada has taken a decidedly more hands-off approach to foreign investment, including that from China, than Australia has.

Canada did, however, reject two prominent foreign investment bids in the years before CNOOC's bid for Nexen. Both were considered under the 1985 Investment Canada Act, which gave the federal government the responsibility to review all “significant” investments into Canada and allowed it to reject them if they were determined
not to provide a “net benefit” to Canada.
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Net benefit, however,
is defined so broadly that practitioners have found it offers little practical guidance.

The first investment bid blocked under the Investment Canada Act was an attempt by the U.S.-based Alliant Techsystems Inc. to purchase MacDonald, Dettweiler and Associates (MDA), an aerospace firm perhaps best known in Canada as the creator of the “Canadarm, ” for approximately $1.3 billion.
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When the bid was initially accepted, in January 2008, the reaction in Canada assumed the deal would sail through.
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Four months later, though, the government stepped in and blocked the deal. Its rationale was a classic national security one: MDA produced a satellite known as Radarsat-2 that is used to monitor the Arctic, an increasing focus of Canadian national security efforts, and an area in which Canada and the United States have competing territorial claims.
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The Canadian government also argued that since MDA had received extensive taxpayer funding (Radarsat-2 had been developed with nearly half a billion dollars in federal government money), allowing it to be sold to a foreign company would be wrong.
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None of these decisions afforded much precedent for judging investments in natural resources (aside perhaps for any in sensitive areas).

The Canadian government made its second move to block a foreign investment, and its first to stop a foreign natural resources takeover, slightly more than two years later. In August 2010, BHP Billiton launched a hostile bid to take over Saskatchewan-based Potash Corporation, presenting an offer of $40 billion.
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(Sinochem of China also considered a bid but withdrew.)
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As global demand for food accelerated in the 2000s, demand and prices for potash, which is used to make fertilizer, soared; between 2001 and 2009, prices rose fourfold.
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As of 2010 Potash Corporation was the largest potash producer and fertilizer maker in the world, with roughly 20 percent of global potash production capacity.
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Potash production is significantly concentrated, with two-thirds found in Russia, Canada, and Belarus.
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(These countries are home to an even larger fraction of reserves.) Yet there was no reason to
believe that BHP Billiton, which had no other stake in the potash industry (or other fertilizer businesses), would act strategically to restrict production following a takeover.
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Nonetheless, against a backdrop of political pressure from the premier of Saskatchewan (the province stood to lose royalties as a result of the purchase), the Canadian government rejected the takeover bid. Announcing the decision, the government declared it was not clear that the takeover would create a net benefit for Canada. Though legal experts generally agreed that the government was required to explain its decision at greater length, it did not.
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This, along with the political context, made it difficult to discern any precedent from the episode.

The scrutiny raised in response to the CNOOC bid for Nexen thus came as a surprise to many. In the aftermath of CNOOC's bid, the left-wing New Democratic Party, the main opposition following a 2011 federal election, argued that, as a result of its opacity and secret nature, the process for determining whether a takeover would be a net benefit for Canada was unreliable.
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Law makers raised concerns about preservation of local jobs, environmental protection, and national security. Criticism from the right focused on claims that CNOOC ownership of Nexen amounted to government meddling in the economy, something conservatives had opposed when the Canadian government was the one involved, and that some opposed when the Chinese government was doing it too.
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As one critic put it, “Is Canadian government nationalization wrong but Chinese nationalization is fine?”
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Others pushed back by emphasizing the need for capital to support oil sands investment and the stake that Canada has in global open trade.
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Since 2007 Canada has also imposed special rules for investments by SOEs. They are required to make commitments to matters such as transparency, decision making based on market conditions rather than political calculus (including on exports and hiring), and more general political noninterference in their operations.
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Whether such promises are adhered to after acquisitions are complete remains to be seen. (It is also unclear how one would determine compliance in some cases, such as market-based decision making, where sensible people disagree about how a given
company should behave.) As in Australia, though, the framework allowed broad discretion for the Canadian government in adjudicating the sale.

Public opinion also weighed in on the debate. Polling revealed the continued unease of many Canadians toward Chinese SOEs. From 2010 to 2012, opposition to foreign acquisitions of Canadian companies—already high—increased.
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In 2010, 71 percent of those polled opposed investments from state-owned Chinese companies; in 2011 and 2012, 75.5 percent of respondents thought Chinese SOEs should not be allowed to buy controlling stakes in Canadian companies.
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Support for China is low in a comparative sense, too. According to the 2012 poll that revealed this aversion to Chinese investment, 51 percent of Canadians were open to British companies acquiring Canadian firms, and 38 percent of Canadians polled believed American companies should be able to do the same.
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Only the United Arab Emirates (UAE), with a meager 13 percent support, ranked lower than China.
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These specific sentiments were backed by broader skepticism: 57 percent of respondents in 2012 did not agree that “economic benefits of Asia's investment in Canada's energy sector outweigh concerns about foreign ownership of our natural resources.”
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