By Jonathan Greenacre and Palak Thaker

SYDNEY - On 25 February 2013, Chinese state-owned entity Chinese National Overseas Oil Corporation (CNOOC) closed its contentious $15.1 billion takeover of Canadian oil and gas company Nexen Inc. This was more than seven months after the deal was announced. The delay in closing was in large part due to the Canadian Government’s difficulty in determining whether to approve the deal, and under what conditions. Recent events suggest that China may be gradually loosening its political hold over its state-owned enterprises (SEOs) and increasing the transparency of such institutions. This process may enable governments to determine Chinese investment proposals on economic, rather than political grounds, which might speed up the approval process.

CNOOC and Shared Regulatory Confusion in Canada and Australia

The Investment Canada Act, RSC 1985 requires that investments over $330 million be of ‘net benefit’ to Canada. Debate raged within the government about whether the CNOOC deal would provide such benefit. A member of government’s Conservative Party, MP Harold Albrecht argued that the Government should restrain the acquisition to indicate its disapproval of Chinese contravention of free-market principles. Other Conservative MPs raised currency market, human rights and environmental concerns.  Eventually, on 7 December 2012, Christian Paradis, Minister of Industry in the Canadian Government, declared he was satisfied that the takeover would provide net benefit to Canada, and approved the deal.

So Canada, or at least this present government, is in favour of investment from Chinese SOEs.  Or is it? Following the approval, Canadian Prime Minister Stephen Harper indicated that in the future such approval would only be given to similar deals in ‘exceptional circumstances’.  Hardly illuminating.

Similar regulatory confusion exists in Australia where politicians seek to use debate on Chinese investment for political ends. In July 212, Opposition Leader Tony Abbott made a speech in Beijing in which he warned that a government under his leadership would rarely consider investment by Chinese state-owned entities to be in Australia’s national interest.  His subsequent attempts to downplay the remark was not helped by Nationals Senator Barnaby Joyce appearing in TV advertisements which sent a public warning against “selling Australia”.

As in Canada, Australian governments like to hedge their bets on Chinese investment; stating that such investment is welcome but providing little guidance on when it will be approved. The Australia in the Asian Century White Paper signaled support of inward foreign investment (‘[We] continue to welcome foreign investment’), but provided scant guidance to Chinese investment about when the government will let deals actually happen. Neither Labor nor the Coalition have released their manifestos in relation to Chinese investment, but it may figure prominently in the lead up to the election on 14 September 2013.

Bringing in Economics and Taking Out Politics

Foreign investment has been vital for many countries that have undertaken rapid economic development, such as Singapore. Australia has benefited enormously from the United Kingdom, United States, and Japan, including in the mining sector. The benefits of CNOOC’s proposed takeover of Nexen seemed clear, at least to Nexen’s shareholders. The deal was approved by 99% of Nexen common shareholders and 87% of preferred shareholders.

Governments’ difficulties in determining whether to approve foreign investment through SOEs comes from the connection, or perceived connection, between the Chinese Government and such enterprises. This is where transparency, particularly when that transparency indicates an arms-length relationships between the government and commercial entity, can make it easier for countries such as Canada and Australia to determine whether to approve an investment from Chinese SEOs. Sovereign wealth funds have embraced the concept of transparency. The Santiago Principles, a series of voluntary principles drafted in 2008, expressly state that sovereign wealth funds should “have in place a transparent and sound governance structure that provides for adequate controls, risk management, and accountability (Santiago Principles 2008, 4).

These principles were designed to allay risk and suspicion. David Murray, Chairman of the Australian Future Fund Board of Guardians, was also chairman of the Santiago Principles drafting sub-committee.  In 2008, when drafting the principles, he noted “governance and accountability arrangements give considerable comfort especially in the area of the separation of operations of the sovereign wealth funds from its owner”, and can “make it clear that sovereign wealth funds act from a commercial motive and not other motives”. 

China – Signing onto Transparency?

The Chinese government is unlikely to remove its hands entirely from SOEs for the foreseeable future. There are two reasons for this, although the ongoing lack of transparency in the country’s political system makes it difficult to state these reasons with much certainty. First, China’s “going out, bringing in” strategy of expanding its commercial interests abroad to attract competitive processes and technologies to Chinese companies, is still a popular one. This approach aims to create increases in productivity similar to those that lifted the Tiger economies into developed economy status by boosting their economies onto the capital-exporting rung of the economic development ladder.

Second, China may be seeking to use its SOEs to gain influence over energy resources in order to mitigate shocks to energy prices, and secure supply of commodities in the face of trade shortages which could jeopardise future economic growth. China’s progressive penetration into overseas resource markets can be seen in the 2009 A$3.5 billion acquisition of Australian Felix Resources by China’s Yangzhou, Petronas Energy’s $5.5 billion takeover of Canadian company Progress Energy Resources in 2012, and CNOOC’s takeover of Nexen. 

However, and as noted elsewhere by other commentators, China has appeared to move gradually in the direction of transparency, and recent developments suggest that it is continuing to move in that direction. For example, in January 2008, the state-owned Assets Supervision and Administration Commission (SASAC), which monitors the activity of major SOEs, issued non-binding guidelines stating that SOEs should fulfil corporate social responsibilities in countries in which they operate. In 2012 the SASAC issued a directive requiring centrally-controlled SOEs planning to invest overseas in areas outside of their core business to obtain approval before doing so and lodge details of their investment and financing sources with SASAC. 

At the most recent 8^th Party Congress, held on 8-14 November 2012, former Prime Minister Hu Jintao proposed that China’s new leadership should embrace looser controls on Chinese SOEs. He also “we should separate government administration from the management of enterprises” to achieve reform of the administrative system. More broadly, in 2012, Wang Yong, director of the State-Owned Assets Supervision and Administration Commission, indicated a move towards loosening the grip of the state on business administration, saying “we have seen a tendency for some local governments to meddle in the everyday operations of state-owned enterprises”. There have also been attempts to hold SOEs more accountable for their expenditure. For example, recent tax reforms will increase the tax rate applied to SOEs by about five percent of profits.

Conclusion

The delay in approving the CNOOC deal provides another example of a large Western country struggling to determine whether to permit an investment from a Chinese SEO into its prized sources sector. Voter and political concerns about the deal, focusing on the alleged ties between the Chinese government and SEO, demonstrate the importance of investor transparency. Recent developments in China suggest that China may be moving in that direction. If this process continues, when countries consider investment proposals from Chinese SOEs, the economic benefits of such proposals might move towards centre stage, and political concerns could exit (or at least move to) stage left.