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May 25, 2018

China warns of Canadian investment chill after Aecon deal blocked

Aecon Group

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China is warning of a Canadian investment chill after the rejection of the Aecon Group Inc. takeover

Prime Minister Justin Trudeau’s government on Wednesday killed a proposed Chinese takeover of the Toronto-based construction firm, citing advice from national security agencies. Following the decision, the Chinese Embassy in Ottawa issued a written statement cautioning the move was not “good news for the investment cooperation between China and Canada.” The embassy later issued a second statement criticizing “politicization” of national security risks.

The move comes at a critical point for the future of Canada’s trade relationships. The country is considering launching trade talks with China as it seeks to become less reliant on the U.S. market. Trudeau has also been working to reverse a drop in foreign direct investment into the country, and China remains one of only a few deep sources of foreign capital, said Jia Wang, deputy director of the University of Alberta’s China Institute.

“It will probably have some chilling effect of the Canada-China relationship,” she said in a telephone interview on Thursday. “The Chinese really wanted to have more clarity in Canada in terms of Chinese investments, they want to feel that they’re welcomed here.”

Trudeau’s government sought to downplay the diplomatic fallout, casting the decision as exceptional. Innovation Minister Navdeep Bains said the case was one “specific transaction” and he was confident Canada and China will continue to work together.

“We’re open for trade, we’re open for investment, but not at the expense of national security,” Bains told reporters in Ottawa. Canada’s security agencies “clearly gave advice that this decision should be blocked and I followed that advice.”



UNCERTAINTY 

Canada blocked the C$1.2 billion (US$934 million) takeover of Aecon by a unit of China Communications Construction Co. Bains didn’t specify which sectors or Aecon customers were the problem. The company’s shares fell 15 per cent in trading Thursday, closing at C$14.67, well below the proposed takeover price of C$20.37.

In its second statement, the Chinese Embassy said it doesn’t interfere in security reviews. “However, we do not agree with the politicization of relevant acquisition on the grounds of national security. The acquisition itself is a win-win business deal, the rejection will cause losses to both sides.” China hopes Canada will treat its state-owned enterprises in “an objective and rational manner,” it said.

Stewart Beck, a former Canadian diplomat in Asia who is now president and Chief Executive Officer of the Asia Pacific Foundation of Canada, said he had expected the deal to go through. The rejection creates uncertainty about Canada’s investment climate, he said, particularly at a time of high-profile wrangling over Kinder Morgan Inc.’s Trans Mountain pipeline.

“I was disappointed that it happened, because investment in a construction firm is not an investment, in my mind, into companies that are holding sensitive technologies,” Beck said in an interview. “This isn’t the first time the Chinese have commented on our investment policies and I think they will be concerned.”

Chinese acquisitions in Canada have cooled since 2012, when the previous Conservative government imposed limits on investment by state-owned enterprises in the energy sector following CNOOC Ltd.’s takeover of Nexen Inc. in Alberta.

NAFTA APPEASEMENT? 

Making matters worse is an impression Trudeau could be seeking to placate the U.S. with the rejection. Wang, of the University of Alberta, said the decision may have been influenced by ongoing North American Free Trade Agreement talks between the U.S., Canada and Mexico at a time when the Trump administration is sparring with China on trade. “Maybe Canada is hoping not to somehow in any way upset the Americans,” she said.

Speaking Thursday, Bains rejected any suggestion of a NAFTA link, saying Aecon was “a decision based on the merits of the acquisition regardless of other discussions taking place.” He put a positive spin on the outlook for bilateral ties between the countries.

“I’m very confident that we’ll continue to work together to strengthen our economic ties,” Bains said.

While upset with the decision, China’s government left the door open for reconciliation, with the embassy’s second statement expressing hope Canada would “meet with China half way and make joint efforts to create enabling conditions for sound development of our bilateral economic and trade cooperation.”