On May 23rd, the Canadian Government prohibited the $1.5 billion acquisition of Canadian construction company Aecon Group Inc., by China Communications Construction Company International Holding Limited (CCCC), one of the world's largest engineering and construction firms, for national security reasons.
In his statement, Minister of Innovation, Science and Economic Development Navdeep Bains stated that Canada is "open to international investment that creates jobs and increases prosperity, but not at the expense of national security." The federal Cabinet made its decision more than 3 months following its commencement of the national security review.
This decision represents the first major transaction that has been blocked by the Trudeau Government since it came to office in October 2015. In fact, the Trudeau Government has been criticized for being "too soft" on China, having last year reversed the previous Government's decision to reject the acquisition by Chinese investor, O-Net Communications, of ITF Technologies, a Quebec company specializing in fibre components, modules and lasers ( see related article) and having allowed a number of transactions that some commentators argued raised national security concerns such as Chinese company Hytera's acquisition of Norsat, a maker of satellite communications technology and a supplier to the US Government.
That said, the current Government made three divestiture orders related to foreign investments in its 2016-17 fiscal year (the nationality of the investors is not public) so that the CCCC/Aecon decision does not represent a sudden hawkishness on national security on the part of the Government.
The Aecon/CCCC deal has been subject to public debate since it was first announced last fall with commentators on both sides vigorously defending or opposing the deal. The nature and size of Aecon's business contributed to the concerns about national security. Aecon is a significant player in the construction of infrastructure, including telecommunications networks, transportation, electricity grids and military facilities, as well as the refurbishment of nuclear power plants, while CCCC is majority owned by the Chinese government. Aecon itself supported the CCCC acquisition as a means of more effectively competing with large global construction companies. A CCCC company had previously acquired an Australian construction company, John Holland, a transaction approved by the Australian government in 2015.
However, the federal Cabinet must have concluded that the combination of CCCC's status as a state-owned enterprise (SOE) and Aecon's work on critical infrastructure made the acquisition a material risk to Canada's national security. Reports in the media citing unnamed senior government sources also suggest that giving CCCC access to data and intellectual property relating to Aecon's past and future work were factors in the decision-making.
Given the size and profile of the transaction, and that it involved a Chinese state-owned company, the prohibition may have negative repercussions for Canada-China relations. The Chinese government, including the Chinese ambassador to Canada, had supported the deal. Yesterday The South China Morning Post reported that the Canadian Government's rejection of CCCC's investment was "the latest move by Western nations weighing national security concerns associated with Chinese investment." It also referred to President Trump blocking Broadcom's hostile takeover of Qualcomm on national security grounds.
It may take some time to assess any damage to Canada's relationship with China. The decision could be viewed as a one-off refusal that will not have an enduring impact on Canada/China relations or it could lead China to a broader and more far-reaching re-evaluation of the Trudeau's government commitment to China and potentially negative consequences for Chinese investment in Canada.
Containing the impact of the decision to short-term damage is possible if the Chinese government regards Canada's decision as one it can relate to: China also does not permit foreign investment in a number of sectors and has a national security screening process. Indeed, since the Government's decision to reject the CCCC/Aecon deal, the Chinese ambassador to Canada, Lu Shaye, has been quoted in the press as stating it is Canada's "sovereign right" to block the acquisition of a Canadian company.
If, instead, the Chinese government regards the prohibition as a broader signal that the Canadian Government is not supportive of Chinese investment in Canada (e.g., Lu Shaye expressed concern that the decision might reflect prejudice against a Chinese SOE) or does not have a consistent and cooperative strategy towards China, then the political goodwill and capital that the Trudeau government had with China in 2015 will be eroded. This could also lead to a deceleration of preliminary discussions on a free trade agreement with China. Early signals from China's ambassador to Canada since the CCCC/Aecon decision suggest that the damage to Canada/China relations may be limited: Mr. Shaye has stated that China would continue deepening its co-operation with Canada.
It is not clear whether the rejection of the CCCC/Aecon deal will discourage Chinese investment into Canada. Although commentators have cited the Harper Government's prohibition of SOE acquisitions of control in the oil sands in late 2012 as responsible for the slowing of Chinese investment in the ensuing years, there are other explanations such as the poor commodity prices that may be larger factors in explaining that trend. As a result of the Aecon deal, Chinese investors are likely to think twice before pursuing investments in sectors that raise potential national security concerns (e.g., critical infrastructure, technology and products used in military applications). Indeed, the decision appears to represent a setback for the Chinese government's consideration of a North American extension to its One Belt, One Road infrastructure and construction initiative.
However, where there are real opportunities in Canada for Chinese investors seeking know-how, technology and resources in industries that are priorities for China and that are not in sectors that are likely to raise national security issues, such investors should not be discouraged. There is no reason to believe that the CCCC/Aecon decision represents a sea-change in how the Canadian Government views Chinese investment. For example, only last year Canada accelerated the raising of the financial threshold for "net benefit to Canada" reviews from $800 million to $1 billion (in the enterprise value of the Canadian company being acquired) for private sector investors from China and other World Trade Organization countries. As a result, fewer Chinese investments are required to clear the regulatory hurdle of demonstrating a positive impact on the Canadian economy.
While the Aecon decision might give pause to Chinese investors in the short term, the Canadian Government may itself be seeking to reassure Chinese investors that the welcome mat has not been whisked away. So, it might just be a good time for Chinese investors to come to Canada.
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