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China's sovereign wealth fund sets up shop in Toronto Add to ...

China is preparing to step up its investments in Canada with the opening of a Toronto office for its deep-pocketed sovereign wealth fund, representing the first permanent foreign location for the state-backed institution.

China Investment Corp. (CIC), which has recently plowed billions of dollars into the Alberta oil sands and Canadian resource companies, will unveil plans for an office in Canada's financial capital next week.

By choosing Toronto over other financial centres such as London and New York for its first corporate location outside of China, the $300-billion (U.S.) fund is signalling it plans to ramp up its Canadian holdings, particularly in the resource sector.

"It is symbolically and substantively significant because its speaks of CIC taking Canada very seriously and wanting to have a permanent presence here," said David Emerson, a former federal trade and foreign affairs minister, who is a member of CIC's international advisory council.

CIC's top executive and chairman Lou Jiwei is expected to be in Toronto to mark the opening of the office. Felix Chee, a former executive with Manulife Financial Corp., who serves as a special adviser to Mr. Lou, is expected to play a key role in CIC's new Canadian operations.

CIC has sought to keep its decision to open the Toronto office out of the limelight because a number of politicians, bankers and business people in the United States have been lobbying for it to open an office south of the border.

"This is a huge coup for Canada and for the City of Toronto," said Manulife Financial Corp. chief executive officer Don Guloien. "It's a great tribute to the investment possibilities that CIC sees in Canada."

With the mandate of investing a sizable portion of China's $2.85-trillion worth of foreign exchange reserves, CIC has attempted to portray itself as a passive institutional investor focused on returns, not boosting state influence. Yet investments in Canadian companies by state-backed entities such as CIC continue to concern some Canadians who are wary of China's government gaining sway over domestic assets and corporations. According to the Asia-Pacific Foundation of Canada, only 18 per cent of Canadians are in favour of a Chinese state-owned company buying a controlling interest in a Canadian company.

Mr. Emerson said CIC's new Canadian presence recognizes that foreign direct investment by sovereign wealth funds remains "a little bit" controversial.

"You need to be on site to understand people's issues and concerns," he said.

"Canada has a good relationship with China that has continuously improved since we took government," Finance Minister Jim Flaherty said in an emailed statement Wednesday. "I've visited China three times as federal Finance Minister and in my last visit in 2010, I discussed the mutual benefits such an initiative would yield to both our countries. I am pleased that the China Investment Corp. has chosen Toronto to locate its North American headquarters."

CIC came to the rescue of a debt-laden Teck Resources in 2009, investing $1.5-billion for a 17-per-cent equity interest in the Vancouver mining firm. That deal has paid off handsomely for the Chinese fund, which disclosed last year that its Teck holdings were worth $3.5-billion. CIC was also recently granted a seat on Teck's board of directors.

Last year, CIC paid $817-million (Canadian) for a 45-per-cent stake in an Alberta oil sands project owned by Penn West Energy Trust, and $435-million for a 5-per-cent interest in the company. The fund has also disclosed small stakes in Potash Corp. of Saskatchewan Inc. and Kinross Gold Corp.

During an interview in October, CIC president Gao Xiqing spoke at length about his desire to do more deals in Canada.

"There are countries with comparable economic characteristics to Canada, but with a lot less friendly environment," Mr. Gao said. "In our dealings with the Canadian government, various parts of the government, with the business people, we feel that it's a lot more congenial to our investments."

A number of bankers say that they are expecting an increase in investments by Chinese firms and investors in Canada over the coming months.

Adam Waterous, global head of investment banking at Scotia Capital, predicts that there will be a series of oil and natural gas deals in Canada this year, and that many of those might have Chinese involvement.

"We expect Asian interest in conventional-operated oil and gas companies and assets in Canada to be substantially higher than in the past," he said.

And he disagrees with the idea that Ottawa's decision to block an attempted takeover of Potash Corp. by Australian mining conglomerate BHP Billiton will cool interest from China for Canadian resource deals.

"There will be certain very large oil and gas companies that may have been on their radar screens which no longer will be, but that's just a handful, it's a very small number," he said. "I don't think there's a perception that Canada's closed the door on foreign investment. In fact, I actually think that the government will be potentially even more accommodating on some of the smaller transactions because there's potentially a view that they want to be seen as still welcoming foreign investment."

A large part of the reason the office is in Toronto is to accommodate Mr. Chee, who has become invaluable to CIC, said one person who deals frequently with CIC. Another factor is the location of various Canadian pension plans, with which CIC is striking up successful working partnerships.

"We look forward to working with them more closely," said Mark Wiseman, executive vice-president of investments at the Canada Pension Plan Investment Board. "We have a good relationship with them. Our office in Hong Kong interacts with them regularly, and them having an office in Toronto will, we think, in the long run further our ability to partner with them in Asia, and for them to partner with us in North America."

The new office is also a symbol of a strengthening relationship that has developed between the Canadian and Chinese business communities.

"We've really seen the relations on an upswing, particularly the investment file," said Sarah Kutulakos, executive director of the Canada China Business Council. "Back in 2007 and 2008, Chinese companies were telling us 'we hear you saying you'are open for business, but we really need to see proof.' In 2009 and 2010, there was a lovely increase in investments both in terms of size and scale, and several of them were CIC."





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