Some of Canada’s best and least understood investment opportunities with China are with Chinese state-owned enterprises (SOEs). For B.C. companies that can overcome the worry of dealing with SOEs and jump on a plane, the rewards can be significant.
It has been estimated that SOEs directly and indirectly account for approximately 50% of China’s gross domestic product. Since the late 1990s, China has been a significant user of base metals. Since 2002, it has accounted for half of the world’s consumption of steel, copper and aluminum as well as much of the world’s growing consumption of nickel, tin, lead and zinc.
Many of the domestic commodities most needed by China are expected to run out by 2020. The top of this list includes iron ore, nickel, zinc, copper, oil, molybdenum and gold. Both private and government-run companies are in a race to source these much-needed products; however, it can be very advantageous to be wearing the government’s colours in this race.
Chinese SOEs and their subsidiaries can benefit from preferred access to bank capital, below-market interest rates on loans from state-owned banks, favourable tax treatment, and large capital injections when needed. Further, Chinese SOEs also appear to dominate China’s expanding government procurement market.
In fact, the need for these commodities is so acute that the Ministry of Commerce is accelerating involvement in the international securement of resources by being proactive in identifying markets where the commodities may be sourced. Given the list of commodities most needed, two of the Chinese government’s top target markets are Australia and Canada.
Traditionally, it could be more challenging to approach a Chinese entity for business than those of some other countries due to the concept of face time and the need for time in which to build trustworthy relationships before business agreements could be signed. However, this is no longer the case.
Chinese SOEs are keen to meet with and seriously consider doing business with Canadian entities without the need for a long-standing relationship. Of course it doesn’t hurt to go in with a recommendation from a trusted friend or counsel of your target.
But often, face time, availability of goods or services required and the courage to forge a deal are all you really need to begin a business relationship with a Chinese SOE. The converse is that SOEs rarely show the client the degree of loyalty often seen from Canadian clients.
To prepare, start by spending some time on the Internet to determine the key SOEs in your industry. Do some research and find out as much as you can about the organization you wish to pursue and prepare your business case for the approach.
When you’re ready, reach out and introduce yourself. It also helps if you can manage an introduction from a supplier they know and trust, such as a bank or an accounting firm. Finally, offer to get on a plane and fly out to meet with them in person.
Before you go, it helps to understand Chinese culture, so a quick trip to your local bookstore will help to prepare you. There really aren’t many other barriers. China is very keen to speak with Canadian businesses – especially those engaged in areas in which they have high need. Apart from commodities, this includes communication, high-tech, education and health.
Chinese SOEs have not always been warmly embraced by the court of public opinion in Canada. However, since the 2009 approval of CNPC’s investment application in the Athabasca Oil Sands Corporation, there has been a slow and steady acceptance of Chinese SOE interest in Canada. While the recent Investment Canada decision in CNOOC/Nexen drew cautionary lines around the Alberta oil sands and certain key players in the energy industry, it did serve to show the interest of SOEs in traditional mining businesses.
Today, acceptance of foreign investment is considered a critically important part of our economy. It makes sense that in such an environment B.C. companies here on the Pacific Rim seek to benefit from such an economic development.
