Learning to love the dragon

Can Felix Chee change the way his fellow Canadians view Chinese state investment in our economy? As the first overseas point man for China's $300-billion sovereign wealth fund, he knows people are listening
By Robert Thompson

FELIX CHEE FEELS misunderstood—and pulled in a lot of different directions.

Sure, Chee understands what it is to be busy. As the former chief investment officer at Manulife Financial and head of the Ontario Hydro pension plan and University of Toronto Asset Management, Chee has played in the big leagues for decades. But now as the point person in North and South America for China Investment Corp. (CIC), China’s $300-billion sovereign investment fund, he’s wearing a lot of hats. He’s part investment banker, part public relations liaison, and a government lobbyist—all at the same time. It is hard enough to simply source intriguing investment opportunities for CIC—he was poised to head out on a trip to Chile with Canadian mining giant Teck Resources Ltd. (TSX:TCK) after our interview—but he also has to convince Canadians that the Chinese investment operation doesn’t have some imperialist agenda. Chee knows the questions about China’s intentions are coming. He’s been hit with an onslaught off them since CIC chose Toronto as the location of its first office outside of China in January. He also faced a barrage more in April and May when, first, China’s Minmetals Corp., the government-controlled metals and mining company, announced it was considering a US$6.5-billion pitch for Canadian-based Equinox Minerals Ltd. (TSX:EQN), and secondly, when news broke that a Chinese consortium including CIC was in talks to buy Lundin Mining Corp. (TSX:LUN) of Vancouver.

Minmetals quickly stepped aside when Canada’s Barrick Gold Corp. (TSX:ABX) came forward with a larger, formal bid for Equinox, but even the mere mention of its interest, and the subsequent Lundin talk, had observers raising the familiar spectre of a hidden threat in Chinese takeovers of Canadian companies.While everyone understands China’s need to secure access to commodities to fuel the needs of its burgeoning manufacturing-driven economy, many still see something nefarious afoot—specifically, that Chinese state-run businesses are trying to put a stranglehold on our strategic resources. It is something Chee has heard many times before.

“At the back of everyone’s mind is [the idea] there is a monolith behind it and all of it is a coordinated plan using all of the different Chinese companies,” he says, sighing. “And nothing could be further from the truth.”

What’s clear now is it’s an issue that Canadian companies—not to mention Canadian politicians and the general public—must learn to deal with. While Chinese investment in Canada has actually been quite modest ($3.2 billion in 2009, accounting for only 0.6% of the overall $600 billion in foreign direct investment in Canada that year), that seems certain to change. In the past 18 months, resource investments by Chinese state-owned entities topped $10 billion. What’s more, China’s increased activity presents big opportunities for Canadian companies—both those looking for capital infusions as potential investment targets, as well as banks and law firms seeking work as partners on deals. The only hitch? In dealing with CIC or other Chinese government- controlled operations, they must feel comfortable enough with the higher level of scrutiny and public relations spin (pro and con) being placed on Chinese spending.

It’s easy to see why companies looking for capital could be better served by having more Chinese investors in the queue. Strategic buyers, institutional investors such as the Ontario Teachers’ Pension Plan or the Ontario Municipal Employees Retirement System, and other global sovereign funds are already in a competitive battle for quality targets; throw a more active China into the mix, and it makes for an even stronger seller’s market.

On the deal-servicing side, the opportunity is wide open, too. Though CIC did its early dealings in Canada through Scotia Capital, Chee says the organization plans to deal with multiple financial institutions depending on the deal. To date, however, Canadian banks haven’t taken a significant role in Chinese M&A. Scotia’s involvement with CIC’s Teck deal put it ninth globally in Chinese mergers and acquisitions in 2010, with no other Canadian bank sitting in the top 50. This year Royal Bank sits fifth, but only because of its role in assisting EnCana Corp. on its $5.4-billion deal with PetroChina.

Not everyone is nervous of Chee and his $300-billion fund. Kenny Zhang, senior project manager at the Asia-Pacific Foundation of Canada in Vancouver, says CIC and others offer opportunity for Canadian businesses and banks. “Canada has the fear of rising China,” says Zhang.“We are not used to seeing such a phenomenon. We don’t know how to respond. We can’t stay fearful forever as the international economic landscape changes towards Asia. How should Canada respond to this global trend? We need to be positive—it is beneficial for the Canadian economy.”

On the other hand, Chinese companies are partially to blame for that misunderstanding, says Erica Downs of the Brooklings Institution, a Washington, DC, think tank. While Chee might dismiss the notion of a centrally controlled single entity attempting to corner key resources and commodities, Downs calls Chinese investors “opaque,” saying there is still mystery surrounding China’s investing strategies.

“It is hard for people to understand the relationship between the party state and the entities that are making the investment, whether it be CIC or Chinese Investment Bank or one of their mining companies,” Downs says. “It is opaque and people want to know what the relationships are, what are the objectives and who is really calling the shots. People wrestle with this because of the degree of interplay between the government policy and the interaction of the companies abroad.”

Don Lindsay knows firsthand about the power of Chinese investment. As president and chief executive of Vancouver-based Teck Resources, Lindsay faced a pressing need to refinance massive amounts of debt just as the financial downturn hit towards the end of 2008. In the economic fallout, Teck sought to sell 20% of its coal business, and sought potential partners. It spoke with CIC in early 2009, but Lindsay soon realized the opportunity was far larger than the initial coal proposition.

Lindsay says Teck monitors numerous sovereign wealth funds, but was keenly interested in CIC not just for its capital—which amounted to $1.5 billion for a 17% interest that helped allay the mining giant’s debt concerns—but also for other tangible, if less obvious benefits. “Strategic investors can bring something else other than money,” he says. “CIC was a really good fit from that standpoint. Other countries that aren’t consuming resources in the same way can bring less to the table.”

The Teck deal was CIC’s first Canadian deal, and it would pay off significantly. CIC acquired 101 million shares in July 2009 at $17.21 per share. Teck’s class B shares hit highs of upwards of $60 this January, making CIC’s investment worth $3.6 billion more than it paid less than two years earlier.

Lindsay says he was interested in Chinese opportunities from the point he joined Teck in 2005, but the opportunities that followed the CIC deal still came as a surprise. At his first meeting in Beijing with CIC following the share deal, the Chinese investment fund introduced the Teck CEO to three of the largest coal companies in China, and that wasn’t all.“There was also a coal blending company we had never even heard of and they came with a PowerPoint presentation showing they wanted to buying three million tonnes right away,” he says. “That just doesn’t happen in our industry.”

Lindsay says the Teck deal was a tough negotiation. CIC didn’t get a board seat (though Chee would eventually join Teck’s board at a later date), and couldn’t sell its stake to any mining company or any of Teck’s customers.

Chee says the Teck deal set the model for CIC’s interest in Canada and abroad. Those naysayers who suggest the sovereign fund is simply a front for a takeover of Canadian resources ignore CIC’s stated objectives, he says. While other Chinese entities—like PetroChina, which earlier this year paid $5.4 billion for half of EnCana’s Cutbank Ridge shale natural gas assets, or Minmetals, which has been sporadically active in Canada for some time—have made takeover attempts or sought majority share positions, Chee says CIC won’t take a majority position and won’t enter into a hostile investment. “Those are the differentiations that we try to make,” he says. “Having said that there is still the tendency to lump all the Chinese investors together.”

Preaching CIC’s message that it is only an investor takes up to half of Chee’s time these days. While CIC has been the target of critics, Chee says that most simply misunderstand how the fund works. That includes members of Stephen Harper’s Conservative government, which has been criticized in the past for ignoring Chinese economic opportunities.

One thing is clear—there is a level of coordination by Chinese government businesses seeking to make Canadian acquisitions. Chee says organizations like Minmetals have to receive the go-ahead from China’s National Development and Reform Committee. Interesting, CIC doesn’t follow the same protocols, Chee says, since it isn’t taking a majority stake in any of its investments.“ A Chinese company wanting access to base metals is no different than Exxon [Mobil Corp.] saying it will have a significant presence in the Middle East,” Chee explains.“This is, at its macro level, an economic hedge. Just because a foreign company buys a mine in B.C., it isn’t like that mine is going to magically pop up somewhere in the ground in B.C. You can’t move it.”

The notion of a monolithic Chinese commercial power is common in North America, says Brooklings’ Downs. A former analyst with the Central Intelligence Agency who has spent much of her career studying Chinese trade, Downs says pundits often use fear-inducing rhetoric when discussing Chinese foreign investments, though she admits those fears have been heightened by aggressive takeover attempts, citing China National Offshore Oil Corp.’s failed unsolicited US$18.5-billion play for Unocal Corp. in 2005 as an example.“In oil, [too,] there have been these concerns the Chinese government is so paranoid about access to energy that it is dispatching these companies abroad and whatever they get they will ship it back to China and make the tradeable pool of oil smaller,” she says. “That reflects a misunderstanding of what the Chinese companies are doing and a major misunderstanding of how the oil market works.”

Downs says some of the concern about CIC stems from its timing—deals like the Teck arrangement were made following the economic downturn in 2009. She says that CIC was simply taking advantage of a shift in the market. “For CIC it was about how they could profit on someone else’s misfortune,” she says. “That’s not unique to CIC. Any other banker would capitalize on buying something in the cheap if they think that price will rise over time.”

For the time being, Canadians at large remain reticent to accept Chinese investment. According to Asia-Pacific Foundation’s Zhang, his organization’s polling indicates only 18% of Canadians are supportive of Chinese state-run investments. To the contrary, he notes half of Canadians are supportive if the government of the United Kingdom or Singapore is to make an investment here. While he won’t comment on Chee’s public relations strategy, Zhang says Chinese investors are sensitive to this resistance and have learned from some of their past failures. “I think the story is changing,” he says.

Chee knows that for the next few years, a significant amount of his time will be taken in convincing people that CIC shouldn’t be treated differently than other sovereign investment funds.“Right now we are much more reac- tive,” Chee says. “What we have to do right now is decide what sectors and themes we want to focus on and are there specific companies or entities we have interests in. The sector that is most interesting is resources—oil and gas, minerals, infrastructure, and agricultural to some extent. But we aren’t limited to that. There are just certain sectors that are of more interest, but if there’s a chance at a high rate of return, we’ll certainly look at it.”

As suggested above, that means more potential competition for Canadian institutional funds like Teachers, OMERS and others. “CIC could increase competition for transactions, especially if they are willing to pay higher prices than others,” says one executive with a domestic institutional fund. “But I would say that this has not happened yet.”

On the flip side, the executive says, CIC’s presence creates opportunities for Canadian funds that cannot raise the capital to do mega-deals. There’s a tradeoff, the executive notes, one that could benefit both China and Canadian firms.“Having them as partners allowsus to bring more cash to the transaction,” he says. “On the other hand, we have been doing these deals for longer so we bring more experience to the table—and they bring the cash.”

It might not stay that way long, he admits. “They are getting up the curve quickly in terms of deals.”

As for Chee, he wants to accomplish a great deal before his current contract expires in 2013. He’s already investigating investment opportunities outside of Canada—in the technology sector in the U.S. and in resources in Latin America and Brazil, for example. When he’s done, he hopes CIC will have prospered and Canadians will have a better understanding of China and its investment aims.

“I hope we’ve sourced some good transactions for CIC that are not just confined to Canada, with some of these from outside of our current sectors of interest,” he says. “And secondly, I hope that the comfort level with CIC— and Chinese investing in particular—is enhanced from the level of today. In other words, the perception has changed.”

Robert Thompson is a Toronto-based business writer and editor.

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