Under trying relations with China, Canada is getting a better appreciation of how China’s state-owned enterprises (SOEs) can damage foreign economies and threaten national security.
Duanjie Chen, a senior fellow with the Macdonald-Laurier Institute and an expert on China’s SOEs, said in an interview that they are tools the ruling Chinese Communist Party (CCP) uses to achieve its “dream of global hegemony, through which China could rewrite international norms to its liking.” This would mean conducting business not by the rule of law, but by underhanded means like corruption.
With SOEs being the backbone of the Chinese economy, the ruling communist regime can be far more efficient in influencing it, Chen explained.
The Canadian Security Intelligence Service (CSIS) tabled a report on June 20—without mentioning China—about SOE acquisitions in strategic sectors that threaten espionage, foreign influence activities, and illegal transfers of technology and know-how.
“CSIS expects that national security concerns related to foreign investments in Canada will continue, owing to the increasingly prominent role of SOEs and state-linked private entities in the economic strategies of some foreign governments,” according to the report.
Chen says everyone understands CSIS is talking about China. “The fundamental fact is that China is the only country that uses its SOE globalization to build up its government hegemony,” she said. “Only if you could find another country acting like China would you want to question CSIS why it didn’t name names.”
After the Canadian government rejected the takeover of Aecon by a Chinese SOE last year on national security grounds, a new challenge may come in the precious metals sector. On June 20, Bloomberg reported that China National Gold (CNG) was mulling a stake in mid-cap gold miner Iamgold.
CNG’s origins have ties to the People’s Liberation Army—like Huawei. The SOE is the second-largest Chinese gold miner.
Iamgold currently operates four mines, with one being in Canada. It has been a laggard among Canada’s gold miners—its stock down 40 percent in the last year. With the wave of consolidation in the industry, Iamgold has remained standing, likely due to difficulties at its Westwood mine in Quebec. New ownership would have to deal with significant operational challenges.
“It’s easier to grab any foreign company that is in desperation,” said Chen.
Chinese SOEs do not think or act like free market private firms. They aim to gain market share before worrying about profitability, explained Jack Mintz, President’s Fellow at the University of Calgary’s School of Public Policy, in a prior interview.
China’s SOEs have a track record of overpaying for companies in distress and not doing proper due diligence—which makes it very attractive to the shareholders of those companies. But Chinese SOEs also have a poor track record of managing mining projects, as Australia has experienced.
The Chinese SOE Sinosteel overpaid for Australia’s Midwest Corp. in 2008 and suffered a heavy loss when iron ore prices plunged. Metallurgical Corp. of China began managing the CITIC iron ore project in 2007, but after more than US$3 billion in cost overruns, CITIC took over management in 2013.
In 2017, CNG was investigated for corruption after its former CEO accepted bribes for purchasing the Jintai-Hongqi Gold Mine in China at an inflated price based on a study that overestimated the gold reserve at the mine.
Chen notes that Chinese SOE CNOOC’s purchase of Calgary-based Nexen in 2012 came at a time when China wanted to grab oil reserves around the world. That takeover did not work out well for China, nor for many Canadians who were laid off.
Another Chinese SOE, PetroChina, once reported a US$800 billion loss over a 10-year period.
Gold En Vogue
Gold as a diversification play in investment portfolios has always been one of its calling cards, and with many developed-market interest rates below zero, gold is getting even more demand. Chinese citizens can hold gold as a store of value instead of having faith in their own yuan-denominated assets.
In addition, slowing global growth, the U.S. Fed being open to cutting interest rates, and rising geopolitical tensions all support gold’s rise.
China has been stockpiling gold bullion for several years and has been handsomely rewarded so far this year. The price of gold has surged recently, and on June 24, gold traded at over US$1,400 an ounce for the first time since 2013. China is the second-biggest holder of gold after India.
Strategically, China wants its yuan to be the world’s reserve currency instead of the greenback. China’s ability to back its currency with gold reserves can potentially help it reach that objective.
“In general, all that the CCP wants is the power of control. … Whatever they can hold on to would increase the size of their bargaining chip,” Chen said.
China has usurped from the United States a dominant position in rare earth minerals—used in making a variety of electronics—and has threatened to cut off America’s supply as a tactic in the trade war.
In March 2018, while the feds were reviewing the Aecon takeover, an Ipsos poll revealed that opposition to foreign ownership of Canadian companies reached 79 percent if the potential buyer is an SOE. And this was well before relations between Canada and China nosedived after Huawei executive Meng Wanzhou was arrested in Vancouver.
The Investment Canada Act prescribes thresholds of enterprise value at which the government undertakes a net benefit to the country review when a takeover bid materializes. If the potential acquirer is an SOE, that threshold drops from just over $1.5 billion to $416 million. According to the act, the problems with SOEs include their lack of transparency and lack of strong commitment to commercial operations.
The threat of China’s SOEs interfering in Canada’s economy compelled Senator Thanh Hai Ngo to propose a bill that would require a mandatory national security review any time a foreign investment in Canada is proposed by an SOE. The bill pointed the finger straight at China, mentioning metals and minerals as a key sector to be protected.Follow Rahul on Twitter @RV_ETBiz