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A woman walks past CNOOC headquarters in Beijing in this 2008 file photo. Canada should reject most if not all future corporate takeovers from Chinese state-owned enterprises, contends a new report from the University of Calgary’s School of Public Policy, arguing they are little more than agents of the Beijing government.

Ng Han Guan/AP

Canada should reject most if not all future corporate takeovers from Chinese state-owned enterprises, contends a new report from the University of Calgary's School of Public Policy, arguing they are little more than agents of the Beijing government.

The scathing paper by economist Duanjie Chen, who was born in China, says Chinese SOEs are unlike Crown corporations in Canada in that they don't operate on market principles.

"Canada's business sector should contribute to market-driven economic growth," the paper states. "It should not be allowed to become an instrument in China's distorted and often disreputable drive toward global hegemony."

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Chinese government use of state-owned enterprises, which have taken advantage of special treatment at home to become global powerhouses, has contributed to lower priority on human rights, the environment, social justice and corporate "rectitude," she further maintains.

Chinese ambassador to Canada Zhang Junsai has said the country's state-owned companies make investment decisions based on profit and business potential.

Yuen Pau Woo of the Asia Pacific Foundation called Ms. Chen "alarmist" in her criticism, saying he believes the government should treat all foreign companies operating in Canada equally.

"I'm sure we can find examples of malfeasance of Chinese SOEs, but we can probably find examples in the private sector as well," he said. "The real question is do we have the ability in Canada to either prevent that from happening or impose remedies … for say polluting a fresh source of water?

"And the answer surely is yes," he said, or at least as much as if a private company behaved in a similar manner.

The 24-page report comes after Ottawa gave China National Offshore Oil Co. (CNOOC) the green light to acquire oil producer Nexen Inc. in December.

At the time, Ottawa also introduced new guidelines that would make future takeovers in the oil patch from SOEs more difficult.

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In an interview, Ms. Chen would not go so far as to say the Nexen decision was wrong, but said Ottawa should in the future limit Chinese investment in the vast majority of cases to minority holdings.

Ideally, corporate takeovers should be conducted between firms that share the same values and follow similar principles of corporate governance, Ms. Chen said.

"Basically, what I'm saying is I don't trust them."

The report is not the first from the School of Public Policy to point out the pitfalls of too close an economic engagement with China.

Last fall, in a paper entitled Dancing with the Dragon, anthropologist Josephine Smart cautioned that investing in China poses risks for Canadian investors who don't appreciate the rules of the game as played in the nominally communist country.

Most of Canada's business groups have welcomed closer economic ties to the world's second-largest and fastest-growing economy, however, and the federal government has made not secret it wants in on the Chinese economic miracle.

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Ottawa recently signed a investment protection treaty with Beijing. As well, the two countries have sent signals of a desire for even deeper integration, including exploring the possibility of a future free trade deal.

Ms. Chen says she is not opposed to all investment from China, but added it should mostly be restricted to minority holdings.

As for free trade, she said China should be prepared to offer Canadians what it expects, that is the ability of Canadian firms to acquire a majority stake in their strategic industries. She said she doubts that would be permitted.

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