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Resource-Rich Canada Looks to China for Growth
Read: 3396 Publish: 2012/5/22 15:13:20

For almost a century, Canada's economy has been firmly tethered to its much larger southern neighbor. Now, Canadian officials and executives also are betting their future on China.

Canada's economic reliance on the U.S. has ebbed for decades amid sporadic efforts to diversify. But weak demand from a prolonged economic downturn south of the border has accelerated the move, sending Canadian companies looking for new markets.

Climbing oil production in the U.S. is upending American demand for Canadian hydrocarbons. That has spooked Ottawa, suddenly worried about finding buyers for its own growing crude exports, almost all of which now flows to the U.S.

The shift is sharpest here in Western Canada, rich in resources and closer to China. Last year for the first time ever, British Columbia sent more exports to the Pacific Rim than to the U.S. Chinese investors have beat out U.S. investors in Canada's oil patch every year since 2009, pumping $12.8 billion into companies and projects since then, according to Dealogic. British Columbia and the federal government have embarked on a massive push, spending billions of dollars, to retool the country's infrastructure to facilitate more trade with Asia.

On a national level, Canadian officials say they expect America will always be Canada's biggest trading partner. Last year, the U.S. accounted for 67.7% of Canadian trade, measured by the value of exports and imports. That is down from 80.8% 10 years ago. Asia's share of Canadian trade stood at 15%, up from about 9.5% a decade ago. China's share alone came in at 7.2% last year.

Canada has pushed before to diversify away from the U.S., with mixed success. In the early 1970s, amid trade and economic-policy spats with Washington, Prime Minister Pierre Trudeau pursued a 'Third Option,' courting Europe, in particular.

But Canadian business never strayed too far, for too long, from the world's biggest economy. A free-trade agreement in the late 1980s and the North American Free Trade Agreement the next decade made that market even easier to access.

The shift carries risks, underscored by a recent slowing of China's massive economy, which has weighed on international commodities and crude prices, and by extension Canada's stock-market indexes. By linking its economic prospects more closely to China, Canada may have to suffer through the future ups and downs of Beijing's still-incomplete transition to global economic power. Australia, another resource-rich economy that has taken an even bigger bet on China's economy, has suffered recently amid China's slower growth.

If the U.S. economy bounces back strongly, some of the urgency of Canada's Asian push will inevitably abate. 'The balance of trade will bounce around a bit, but as long as we have several markets, we won't be captive to one,' said British Columbia Premier Christy Clark.

Political unease over Chinese involvement in strategic industries like energy, mining and telecoms is on the wane. In Beijing in February, Canadian Prime Minister Stephen Harper lifted a 36-year ban on Chinese purchases of Canadian-mined uranium. China Investment Corp. owns 17% of one of Canada's largest mining conglomerates, Teck Resources Ltd.

In March, Igor Medge, the vice president of AgriKalum, a Saskatoon-based potash-mining start-up, was trolling for around $2 billion in financing at a Toronto mining conference swarming with Chinese executives and government officials.

'China is the biggest potash consumer in the world, and they have a lot of American dollars that they need to spend,' he said, spooning prawn dumplings from a buffet table onto his plate at a presentation sponsored by the Chinese government.

The tilt is playing out in Canadian demographics. Last year for the first time, Canada's western provinces-those west of Ontario-had more people than Canada's eastern ones, according to government-census data. That was driven in part by heavy immigration, particularly from Asia, the census determined. Chinese is the third most-spoken language in Canada, after English and French.

In Vancouver, a recent influx of wealthy, mainland Chinese seeking real-estate investments has transformed the property market. Real estate here has always been expensive. But the new Chinese buyers have sent valuations soaring. Developers are marketing directly to buyers in China and often giving buildings and developments names that translate well in Mandarin.

Cam Good, president of The Key, a real-estate brokerage and marketing firm, said so far this year he has booked 40 groups of Chinese visitors on buying trips to Canada, in some cases ferrying them on helicopters to view exclusive homes, including along Vancouver Island.

He has opened offices in Beijing and Hong Kong. With so many agents catering to Chinese clients in Vancouver, 'we felt we were fishing in a big lake with lots of other fisherman,' Mr. Good said. 'So, we went upstream.'

British Columbia's provincial government, backed by the federal government in Ottawa, has rushed to support the shift. The province estimates that some $22 billion of provincial, federal and industry funding is now going into infrastructure upgrades across the province. The province is targeting another $25 billion in provincial and private upgrades through the end of the decade. Most of that is to ease the flow of goods bound for Asia, says Ms. Clark, the province's premier, equivalent to a U.S. governor.

In 2011, the province's exports to the Pacific Rim accounted for 43% of its total exports by value, inching out U.S.-bound goods for the first time ever. Softwood lumber exports to China topped $1 billion. That is well shy of the $1.6 billion forestry companies here sent to the U.S. But it now represents about a third of the province's softwood lumber exports.

China's first big foray into Canada didn't go well. In 2004, China's Minmetals Corp. entered exclusive talks to buy Canadian mining giant Noranda Inc., a deal valued at the time at more than $5 billion. The deal foundered amid political opposition in Ottawa.

Over the next few years, Chinese firms kept coming to North America, but they tended to tiptoe in, buying up small firms, minority stakes in bigger companies or working interest in specific projects. Amid the global financial and economic crisis, however, Canadian firms started opening the door wider to Chinese investors.

In September 2008, Toronto-based Liberty Mines Inc. (LBE.T) was set to ink a deal with a U.S. venture capitalist, who had agreed to inject 30 million Canadian dollars (about US$30 million) into the company, to help it develop its nickel prospects in Ontario.

As the credit crisis hit full swing that month, then-Chief Executive Gary Nash told his board the deal had fizzled.

'This financing is not going to happen, we need to look for other sources,' Mr. Nash recalls saying.

So, executives flew to China to visit a Liberty customer, Jilin Jien Nickel Industry Co. Jilin invested $30 million for a 51% stake. It later increased its interest to 60%.

'Without that money the mine would have had to close,' said John Pinsent, one of the directors.

Liberty executives describe Jilin Jien as hands off. 'They tend to leave me to do my thing,' said CEO Chris Stewart, who was passing out cards-printed in English and Chinese-at the March mining conference in Toronto.

About the same time, Chinese companies started to pour billions into Canadian energy companies. In late 2008, China Petroleum & Chemical Corp., also known as Sinopec, said it would buy Canada's Tanganyika Oil Co., which had most of its production in Syria, for $2 billion. A year later, Sinopec struck again, buying Addax Petroleum, another Canadian-listed firm with operations in Iraq and West Africa, for $7.2 billion.

The deals met little opposition because, though listed in Canada, the companies' assets were overseas, according to Sinopec advisers at the time.

The same year, China Investment Corp., the Chinese sovereign-wealth fund, made its own, small moves into North America. It agreed to buy a roughly 17% stake in Teck Resources, Vancouver, one of Canada's biggest mining companies, for $1.5 billion. Then, it agreed to buy a 15% stake in AES Corp., the Virginia power company, for $1.58 billion.

The two deals came to represent the very different investment climates in the two countries. CIC officials grew frustrated with the time it took to explain the deal to American officials and regulators and to close the deal, according to people familiar with the matter. The Teck investment sailed through.

The AES deal was subjected to several U.S. regulatory reviews, including one by the Committee on Foreign Investment in the U.S., an interagency committee coordinated by the U.S. Treasury Department. A Treasury spokeswoman said the committee doesn't comment on individual reviews. AES declined to comment.

Felix Chee, a Canadian of Chinese descent who worked as an adviser to CIC's chief investment officer and helped put the deal together, took a board seat at Teck. A year later, Mr. Chee, who spent most of his financial-services career in Canada, set up CIC's first overseas representative office-in Toronto. Marcia Smith, a Teck vice president, says CIC and Teck now bring each other deal opportunities, though they haven't acted on any yet.

It wasn't until last year that Chinese firms tried again to acquire 100% of a big Canadian-operated resource company. In July, Cnooc Ltd. agreed to buy bankrupt oil-sands developer, OPTI Canada Inc., Calgary, for about $2.1 billion.

The same month, Sinopec hired Canadian advisers to explore an investment in Daylight Energy Ltd., an operator of oil and natural gas fields in British Columbia and Alberta. Chief Executive Anthony Lambert flew to Beijing to meet Sinopec executives, who then came to Canada, according to public filings. In early October, Sinopec agreed to buy the company for $2.1 billion.

Canada's federal government is required to review any significant foreign investment to determine 'net benefit' to Canada. In 2010, it rejected a $39 billion takeover bid by Australia's BHP Billiton Ltd. for Potash Corp. of Saskatchewan Inc., amid political opposition over the deal.

People advising Cnooc and Sinopec last year said Mr. Harper's government, in its review of both deals, was particularly interested in understanding whether Chinese firms were acting alone, in competition with other Chinese state-owned companies, or in cahoots.

'There was a moment when the Canadian regulators seemed to pause to get a better handle' on how the Chinese state-owned enterprises worked, said Jay Kolb, a Shanghai-based partner at Vinson & Elkins LP, one of Sinopec's advisers on the Daylight Energy deal. Ottawa ultimately approved both deals. A spokesman for Canada's Industry Ministry, the agency responsible for reviews, wouldn't discuss specific cases. But he said the government looks for 'sound principles of corporate governance and commercial orientation' when reviewing deals by foreign state owned governments.

The approval process for the two deals came as Canadian officials were lobbying hard for Washington to approve a crucial expansion of the Keystone crude pipeline that would greatly increase exports from Alberta to the U.S.

In November, President Barack Obama delayed the approval until after the 2012 U.S. election. Under a deadline imposed by Republicans, he rejected it outright in January, though he invited the Canadian company building it to reapply.

Canadian officials used the delay as Exhibit A in why they needed to build new markets for its oil. That has accelerated as rising U.S. oil production has helped sink prices for Canadian crude. Without new pipeline capacity out of Alberta, prices have languished amid rising production on both sides of the border.

West Canadian crude sold for a discount of more than $30 a barrel to U.S. blends earlier this year. That is almost double the historical spread since 2005, according to economists at the Bank of Nova Scotia.

Calgary-based Enbridge Inc. is pushing ahead with a $5.5 billion, 730-mile crude line from Alberta to a small port in northern British Columbia. Last month, Kinder Morgan Partners LP said it would spend $5 billion to nearly triple capacity on a line running from Alberta to Vancouver. Companies are also studying plans to export Canadian natural gas offshore.

Also last month, Mr. Harper's government detailed plans to streamline regulatory review of those and other big resources and infrastructure projects.

Joe Oliver, Canada's natural-resources minister, was in China when Mr. Obama announced the delay of the Keystone expansion, and he said the decision 'dramatized' the pitfall of depending on a single market for energy exports. America's growing oil production also underscored the need to find new buyers, he said.

'We've got more than we can use, more than the United States needs,' he said in an interview in late April. 'Diversification is a fundamental, strategic objective of the government, to get the resources from where they are to where they are wanted.'

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