Intelligence

The new 'Red Scare'

TheStar.com - The new 'Red Scare'

There's no other term for it than Red Scare.

Chinese companies, most of them state-controlled, have been kicking the tires of Canadian resource companies since last fall. They haven't bought anything yet — not Noranda Inc., Husky Energy Inc. or any of the other, mostly oilpatch, firms they've given the once-over.

Yet their sniffing around has provoked Ottawa into protectionist mode not seen since the discredited Foreign Investment Review Act of the 1970s and the equally loathed National Energy Program of the early 1980s.

David Emerson, federal energy minister, seemed sanguine at first. Confronted last October with the prospect of a takeover of Toronto-based mining giant Noranda Inc. by China Minmetals Corp., he invoked the need for Sino-Canadian harmony.

"Trade and investment relationships with China are very, very important," he said at the time, signaling Ottawa's reluctance to meddle in private-sector transactions.

All to the good, you would think, in the minds of the laissez faire crowd. But no.

Prominent politicians and right-wing commentators directed a torrent of vitriol against Beijing, assailing not only the regime's civil rights record and bureaucratic corruption but raising questions about its business acumen.

In recent years, Ottawa has been silent as Hong Kong's Victor Li made a play for Air Canada, a Russian entrepreneur stepped into the bidding for Stelco Inc., and a half dozen or so of Calgary's mid-sized oil firms were snapped up by U.S. predators.

But the feds' silence on Communist Chinese encroachment on Canada's resource sector was short-lived, even if the likes of Ralph Klein have been courting the Chinese to bankroll the exorbitant cost of developing Alberta's oil-sands wealth.

The Red Scare rhetoric reached its latest peak last week, when Emerson mused about likely conditions to be imposed on foreign acquirers in legislation that will be enacted this year. Of the Chinese companies' prey, Emerson said last Wednesday, "We would probably want to ensure that these companies were open and transparent and, ideally, continue to be publicly traded."

In the world of mergers and acquisitions, no G-7 government has routinely demanded that acquired companies retain their publicly traded status, a condition that would largely negate the value of many takeover transactions.

What accounts for Emerson's change of heart, backed by supportive noises from Paul Martin? Rhetoric aside, it isn't China's abysmal human-rights record, which hasn't unduly troubled Ottawa or other Western capitals since the Tiananmen Square massacre 16 years ago. In any case, China doesn't rank among Freedom House's latest list of the top 10 most repressive nations, which does include such Western allies as Saudi Arabia and Turkmenistan.

What changed since last fall for Emerson, a former CEO of B.C. forestry giant Canfor Corp., is his recognition of the surprising vulnerability of our resource sector to a rash of takeovers.

Among our widely held producers of materials traditionally defined as having strategic national importance are heavyweights like Noranda, Husky, Alcan Inc., EnCana Corp., Petro-Canada, Suncor Energy Inc., Canadian Natural Resources Ltd., Talisman Energy Inc., Nexen Inc., Inco Ltd., Barrick Gold Corp., Placer Dome Inc. and Teck Cominco Ltd.

`Ottawa wants some kind of mechanism ... so Canadians don't wake up one morning and ask how they all ended up working for the Chinese government'

Think tank executive

With combined assets of $183 billion, those firms would realistically be an affordable proposition for a resources-starved China with its staggering $483 billion (U.S.) in foreign-exchange reserves.

Emerson is now giving voice to an almost unthinkable prospect — the disappearance of pretty much the entire Canadian resource sector under the jackboot of a Communist regime an ocean away.

"We have to ensure — particularly in the case of non-renewable resources — we're not just willy nilly unloading our natural resources without ensuring full benefits to Canada as a result," Emerson said last Wednesday.

This is one of those rare issues that appears to have united the laissez faire crowd and the anti-globalization agitators.

Jim Stanford, economist with the Canadian Auto Workers, is troubled by a resource sell-off by which "we risk reverting to a developing world economy of hewers of wood and pumpers of oil." Stanford's nightmare is that the Chinese buy our flagship resource firms simply for their riches in the ground, and transfer the processing jobs to low-cost smelters and refineries in China at a cost of tens of thousands of Canadian jobs.

"I've said China is a time bomb for the worshippers of globalization," Stanford adds. Canada may be in the vanguard among G-7 nations in objecting to China's closed markets "by finally putting limits on Chinese imports and attaching conditions to investment flows in Canada."

The growing discomfort in Ottawa over Chinese direct foreign investment may be a harbinger as Beijing encounters resistance in industrial nations that don't boast our traditionally harmonious Sino-Canadian relations.

U.S. congressional leaders are seeking to block IBM Corp.'s proposed sale of its personal computer business to Chinese state-controlled firm Lenovo. "This sale could lead to the Chinese government unfairly taking over the global market for personal computers," Don Manzullo, Illinois congressman, claimed last week.

Given that IBM commands just 5 per cent of the U.S. personal computer market, one can only imagine the U.S. backlash if China bid for a truly important enterprise such as Intel Corp., Newmont Mining Corp. or ExxonMobil Corp.

One must leave such scenarios to the imagination, since they are extraordinarily remote. There is a discernible rise in paranoia about China south of the border, where David Hale's website, Chinaonline.com, monitors creeping Chinese influence around the globe. Hale argues that the British and American empires were founded on resource exploitation, and notes that the Chinese have already deployed some 20,000 troops in Africa to guard Chinese investments in mines and oilfields in places like Sudan.

While no one has yet joined any dots showing that Ottawa is reflecting a growing concern about Chinese economic hegemony in Washington, an executive with an Ottawa-based corporate think tank doesn't dismiss the linkage.

"Remember that China is the same country the Pentagon war-gamers now size up as America's adversary in any new world war," he says, "figuring out which Chinese cities to target with nukes and which U.S. cities would be hit first.

"But putting that aside, even America's economic policymakers are anxious about China's growing power. When they extrapolate China's fantastic GDP growth rates into the future, it boggles the mind."

For both Canada and the U.S., the current talk of reining in China is motivated by a new type of fear.

"In the past you might not have balked at a one-off deal, where the Chinese buy a Noranda and you can go back to sleep," says the think-tank executive.

"But Alcan and Inco are widely held too, so where does it end? Ottawa wants some kind of mechanism to control this phenomenon, so Canadians don't wake up one morning and ask how they all ended up working for the Chinese government."

David Olive

January 30, 2005 at 11:04 AM in China | Permalink | Top of page | Blog Home