Chinese investor interest in Canada on the upswing

Interest emanating from state-owned enterprises, insurance companies and private interests

When Bluesky Hotels and Resorts Inc. – a closely held company backed by Hong Kong capital – struck a $2.1-billion deal for InnVest Real Estate Investment Trust earlier this month, you better believe it made headlines in Canada.

International papers have been splashing stories about China’s foreign shopping spree on their front pages for months. The Wall Street Journal reported recently that with first quarter of 2016, China had already notched up over $102 billion in foreign deals, setting them up to shatter the $106 billion for all of last year.

In Canada, resident real estate has been flying out the door but corporate deals? Not really.

China appeared to have the post-Nexen blues. State-owned Enterprises (SOEs) weren’t necessarily feeling the love under the former Conservative government after Prime Minister Harper all but shut them out of the oil and gas sector in late 2012. On top of that, with the collapse of resource prices, they’ve had challenges digesting done deals much less selling their government on new ones.

But potential Chinese investors are back and they’re beating the bushes all over Canada, say lawyers who practise in the area.

Christopher Nixon, head of the national China Coverage Group at Stikeman Elliott LLP, is seeing “a significant increase” in the amount of interest out of both mainland China and Hong Kong.

“Interest has been reasonably broad, it’s emanating from both SOEs, the major ones and from the provincial ones, from insurance companies and from private interests. The sectors they’re showing up in are oil and gas, real estate, financial services, some industrials. So, there’s a fair breadth to it.

“We won’t know what the batting averages are until we get a look-back period but the interest has picked up significantly.”

James Pasieka, a partner in the business law group at McCarthy Tétrault LLP, is acting for a group of Chinese investors who put in an offer late last year for Long Run Exploration Ltd., agreeing to a 215 per cent premium over its share price of 16¢.

They are still awaiting regulatory approvals.

Pasieka, who taught international petroleum law in China, says there is a perfect storm of factors behind the current pickup.

The first is a significant difference in values between Canadian and Chinese stock exchanges, which makes Canada look like a real bargain for arbitrage.

The second is that the National Development and Reform Commission (the former State Planning Commission) has streamlined its process for deals under US$1-billion, making them easier to get through. The third factor, he says, is the State Administration of Foreign Exchange has been more generous with its approvals to convert currency into US dollars to complete foreign transactions.

“The window is open for acquisitions,” says Pasieka. “That’s why you’re seeing a flurry of activity. No one knows when it’s going to close.”

Jack Yong, a partner and leader of Gowling WLG’s China Initiative, says from what he’s seen the activity has shifted from state-owned enterprises to private enterprises.

Contrary to what many outside the area might think, China has permitted private companies and helped them flourish since the 1970s, he says.

“From my perspective, the volume of deals has actually increased but we don’t have as many of those large, headline-grabbing transactions which the state-owned enterprises have more of an ability to execute,” says Yong, who has offices in Vancouver and Beijing.

 “So we’ve been extremely busy in servicing Chinese clients in M&A transactions but, for different reasons – partly deal size but partly due to confidentiality – many of those are not publicized. But we’re seeing enormous activity in industries like commercial real estate, life sciences and technology.”

Yong says there has been real interest in Prime Minister Justin Trudeau. “Like many places around the world, the prime minister is popular among Chinese people that I talk to. I think there’s hope that there’s going to be continued progress in terms of openness to investment and trade, as well as immigration.”

If Canada hasn’t been seeing the blockbuster deals once seen in the resource sector and being announced almost weekly in the US, it may be because “Canada is a mid-market country,” says Lily Wang, national leader of the China Focus Group at Borden Ladner Gervais LLP.

“A lot of the targets here are not necessarily the biggest companies in the world.”

Wang, who was called to the Bar in China eight years before being admitted in BC, says she has seen a couple of “relatively big deals coming in” in the oil sector and, with the drop in oil prices, “I have seen resumed interest in the oil and gas field and several of our clients and potential clients are looking at this particular sector.”

Currency is a factor, she says. “China’s private sector has become more active and I think that has a certain amount to do with the appreciation of the RND [renminbi] on the one hand and the depreciation of the Canadian dollar on the other.”

Peter Mendell co-chair of the China practice group at Davies Ward Phillips & Vineberg LLP, says he sees things picking up, but slowly. “If you ask me are there more inquiries and more opportunities than a year ago, I would probably say yes. But everything’s relative.

“Things were very dormant a year ago and there’s more interest now but not enough to say that our inbound work from China is booming.”

Mendell, a former co-managing partner of the firm’s international offices, including Beijing and Hong Kong, estimates he’s been to China 80 or 90 times. He’s going back next month.

“I don’t want to make it sound like the inbound work from China is back to the way it was four or five years ago. I haven’t seen that. There are lots of inquiries, lots of interest, and people do want to meet.

“All those meetings are the result of Chinese companies wanting to discuss possible transactions. Their favourite words are: ‘Bring me a transaction.’ They want to know about the opportunities. But there’s still a distance between that and doing a deal.”