Dec '12/Jan '13

How to say “upside potential” in Mandarin

Gordon Houlden on undeveloped opportunity in the Middle Kingdom

By Antoine Dion-Ortega

Courtesy of the China Institute at the University of Alberta

Few Canadians have scrutinized their country’s relationship with China as closely as Gordon Houlden, director of the China Institute at the University of Alberta. Since he first joined the Canadian Foreign Service in 1976, Houlden has kept a toehold in the land of the dragon. He has witnessed, often from the inside, the drastic political and economic mutations the country has undergone over the last 35 years.

Houlden has been posted twice to Hong Kong and twice to Beijing, where he served as minister at the Canadian Embassy from 2001 to 2004. He then moved to Taipei, where he was appointed executive director of the Canadian Trade Office from 2004 to 2006. Before joining the China Institute in 2008, he was the director general for East Asia in the Department of Foreign Affairs and International Trade.

CIM: Are China’s state-owned enterprise (SOE) acquisitions, such as CNOOC buying Nexen, going to significantly affect the mining sector?

Houlden: There have already been Chinese investments in the mining sectors in B.C., in the Yukon and in the high Arctic; but we are at an early stage. We are seeing a lot of SOEs “going abroad,” to use their phrase, but there is a bigger wave of investments that will break on our shores eventually, and that is private investments.

If you look at the percentage of the GDP that is generated by the government, in the case of Canada it is 40 per cent, almost identical to the U.S. In France it is 52 per cent. But in China, it is just over 20 per cent. The government strategy for 30 years has been to reform the SOEs and to allow a private market to grow – and grow it has. Of course certain sectors, particularly the mining and the energy sectors, are still dominated by quasi-monopolies or monopolies highly concentrated in SOEs ownership. But we may feel a loosening of some of these over time.

CIM: So what will it take to develop those prospects?

Houlden: If Canada has a general policy of openness in terms of investment – and I don’t mean not having any oversight – that to me sustains the mining industry. I am not suggesting China has to own everything in sight either. But if you are sitting there with a mine, that mine is worth more because China is buying its product. If you are in the developmental phase or in the exploration phase, your ore body is worth more because of China’s demand, or potential Chinese investments.

A lot of the smaller mining companies lack the capital to begin to fully develop their properties. The fact that you’ve got a deep pocket in China as a bidder will mean that your property is worth more. Take China out of the equation, somehow isolate the economy the way it was 30 years ago, and properties will be worth less. So there is a benefit there; a policy which has Canada open to Chinese investments helps sustain the value of those ore bodies and the stock values of the Canadian mining companies.

CIM: Should we fear the SOEs as they acquire assets in strategic Canadian sectors such as energy?

Houlden: In my view, many of the strategic risks are exaggerated, both in oil extraction and mineral extraction. Our big oil sands projects take two or three decades to fully exploit. Canada is a sovereign country; we could turn off the tap any time we wanted without a challenge. And oil doesn’t even go to China, it’s sent down to the U.S.

I’m not saying that security shouldn’t be part of the calculation. My concern would be that if you are trying to build a major relationship with China in one dimension alone, just from a security perspective, or just from an investment perspective, you are going to end up with a distorted position, a policy that doesn’t work well and that will probably lead you astray. Even the U.S. doesn’t look at China in those terms.

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