Saturday, December 15, 2012

The takeover of Canada.

            On Friday, December 7, the Canadian government announced the approval of Nexen’s takeover by state owned CNOOK of China, a deal worth $15 billion dollars, as well as the takeover of Progress Energy Resources by Malaysia’s state owned Petronas, another deal worth over $5 billion.  The deals were announced as a great gain for Canada and for Canadians, who stand to benefit from the inflow of such a huge sum of money, which these Asian state-owned companies are committed to investing in Canadian resources.  A parallel announcement was made, which stated that there will be no more takeovers of Canadian natural resource companies by state owned foreign companies.  On December 13, state owned Petrochina just agreed with Encana to buy 49.9% of its Alberta natural gas project for $2.2 billion dollars.  In effect, Encana may not be taken over, but a big chunk of it was just given away.  I doubt there will be any serious opposition on the part of the Canadian government, and if there will be, it will only be because they will want to seem like they have a backbone, while in reality many more such deals will be approved in the near to medium term.

The two statements; one trumpeting the benefits, and the other reassuring us that these sort of deals will not happen again, clearly contradict each other if we stop to think about it.  On one hand, the great benefits of these investments are trumpeted, on the other, a promise is made to no longer allow any such takeovers in the future.  Why would the government make such a pledge, if the deals are so beneficial to Canada and its people?  China for instance has over $3 Trillion in reserves, so why not allow them to invest all of it in Canada, so the good citizens can have 200 x more benefit than they will get from the Nexen deal?  More importantly, should we believe the Canadian government when they declared that such deals will be off the table in the future?

What could $3 Trillion buy in Canada?

            I for one don’t really believe that future acquisitions by the Chinese and other governments will be off the table when it comes to Canada’s resources.  Therefore we should stop for a moment and think what and how much of Canada their money could buy.

            They could buy farmland.  In fact at an average price of $10,000 per hectare (1 hectare = about 2.5 acres), they could buy all of the 67 million hectares[i] for about $670 billion.  At such a premium average price, many would jump to sell.  And why should Canadians not be willing to sell?  The average age of Canada’s farmers is pushing towards 60, and the average Canadian is not exactly interested in taking over those enterprises.  They would much rather pour coffee for minimum wage rather than do the backbreaking work in the middle of nowhere, which actually has importance to society and to themselves, because they would in effect become business owners.  The Chinese government could easily make farmers available for the work needed to be done.  The inflow of such a large sum of money would also register as a net benefit to the economy, just as with the Nexen deal.  The government could also claim that they solved the farmer demographic crisis.

            They could buy the publically traded Canadian companies.  I doubt the Chinese government would be interested in purchasing all the companies trading on the TSX, but just for reference, their total value is about a trillion dollars, so if they were to get all the farmland and all the TSX traded companies, they would spend about half their reserves.  Like I said however, at the moment at least, I doubt China is interested in all those companies.  Perhaps a quarter of them would make the cut, and China would have to pay a premium to make the transactions happen. 

Again, the entire stock index would be pushed sky high, so everyone who owns shares directly or indirectly through pension and mutual funds would stand to benefit, so why not let them?  The inflow of money coming in, year after year, until the takeovers are complete, would make Canada the fastest growing developed economy by far.

Every party followed by a hangover:

            There are plenty more assets that could go on sale in Canada, including private companies, intellectual property, real-estate and anything else that has potential value.  If Canadians were to decide that such a course for the future is a wise decision, they would be proven right by the surface results for about two decades.  The ones advocating against such a move would be branded as racist, bigots, nationalists, primitive minded and a host of other things.  In fact that is what those who will dare to raise objections to such a trend currently can expect to encounter already.  The view Canadians have of themselves is as an open society, willing to embrace foreigners, which they view as a strength.  Any suggestions that their ideological values are in fact a potential weakness, which could be exploited, is not therefore an easy message to accept.

Let us not forget that once an investment is made in a country, the investor usually gains a certain amount of leverage, which comes with the ownership of an asset.  The Chinese government just bought $15 billion worth of assets and leverage in Canada.  I’m sure that if we were to add up the entire sum that the Chinese government controls within Canada already, it would add up to substantially more.  So how many jobs would be directly or indirectly affected if the money currently invested in Canada by the Chinese government, or their mercantilist, private enterprise pawns?  How big would the drop in GDP be if these entities were to stop their operations?  What would be the effect on the stock exchange of a sudden decision to drop Canadian assets?  These are all important questions that need to be asked currently by any Canadian government which might be tempted to oppose the interests of China in Canada.  There is of course another thing that politicians would have to consider, which is the growing ethnic Chinese electorate, which might see any such moves as an attack on China, rather than a move to protect Canada.  There are currently over a million of them (who consider themselves to be of purely Chinese origin), and their number is growing rapidly, so they are not a segment of the electorate to be ignored, or antagonized.  This is the reality faced by politicians today.  With the trend going into the direction of more economic dependency for Canada on China’s huge hoard of cash, and a growing dependency of Canadian politicians on the ethnic Chinese electorate, the choice will not even be there to be made in perhaps a decade or two.  The gates will lie wide-open.

Now that we established the strength of the trend, let us contemplate the effect.  If we go back to the example of the Nexen takeover, the Canadian government was quick to trumpet the benefits.  But how about the long-term drawbacks, which were not mentioned?  For one thing, even though Nexen may be forced to continue its operations in Canada, simply because the resources are in Canada, the net profits after reinvestment will go exclusively to China.  For now, CNOOK will be careful not to rock the boat by transferring non-extractive operations to China, such as management and R & D, but eventually they will, through the pretext of consolidation and the removal of duplicate work.  Transfer of Nexen’s patent portfolio and overall expertise to CNOOK will gradually make it a less important player.  Nexen’s technology will become CNOOK technology, and vice versa, but CNOOK is the main entity, so Nexen itself will become CNOOK.  Nexen will no longer be a driver of Canadian technological development.

The Nexen example is only a small glimpse into the larger trend, which should in my view trouble Canadian society.  The loss of the profits gained due to business activity, and its increased flow outside the country can have very damaging results in the long-run.  Canada needs to consider very carefully its position on the sale of assets of strategic importance.  For instance, in a world which has gone through two price spikes in food commodities and resulting global unrest in just half a decades, and we may be gearing up for the third such event next year, Canada does not have a clear legal position on farmland ownership by foreign investors.  Foreign takeover of farmland is only restricted in the Prairie Provinces, so places like Ontario are still up for grabs.  Who knows, perhaps even the prairies will be open up indirectly.  For instance, there is nothing to stop China from working with a few of the over a million ethnic Chinese citizens of Canada on purchasing the land in exchange for a “loan” from China.  In fact they may already be doing just that.  The path to Canadian citizenship is very easy for anyone who can demonstrate a certain level of wealth.  For all we know, many of these wealthy people coming over from a country like China or other places, may be made wealthy by the government for the exact purpose of indirectly getting past such restrictions.  So a Chinese person may show up with an account showing that he/she has ten million dollars, but what we may not know is that the same person also has a “loan” from a Chinese bank for the same amount. 

Perhaps one day, the provincial governments will open up even those restrictions that currently would cause governments like China’s to come up with more creative ways to get a hold of assets they desire.  In the absence of clear laws, a country like China could essentially move in and take over a large chunk of it with ease, given its large pile of funds at its disposal.  Given that they may already be working on owning certain assets indirectly with the help of Canadian citizens of Chinese descent, we may not even be aware of just how much they may actually own.  Chinese companies which officially figure as private, but in reality are closer to the mercantilist era European companies used as tools of colonialism, such as the Dutch East India Company, may also give indirect access and influence to Canada’s economic base.

Just a few years ago, the political and business mainstream declared the era of cheap oil to be over.  The UN also declared the era of cheap food to be over.  Canada has the potential to produce much more than its relatively small population consumes in the case of both commodities.  It is important for Canadians to understand that what they are sitting on, much of the rest of the seven billion people on this planet are becoming desperate to secure.  Countries like China and Saudi Arabia are already active in securing crucial strategic assets around the world.  Thus far, poor countries in Africa and other less developed nations, with weak governments were the main targets, but increasingly, wealthier countries have been courted as well.  The world is constantly changing and only societies willing to adapt stand to survive.  At present, Canadian society is very confident in its cultural adaptation to this world.  It is often precisely when people become overconfident that unpleasant surprises, often with permanent consequences happen.  One must never stop questioning whether social, cultural norms and institutions, both official and unofficial are adequate to meet society’s ability to meet its ultimate need, which is to survive.





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