China's biggest-ever investment in a Canadian resource asset is a likely harbinger of even larger deals to come, as a looming increase in the value of the Chinese yuan spurs more foreign acquisitions.
But as the Asian superpower's state-owned firms use their more muscular currency to buy foreign oil and metal deposits, they will almost certainly follow the example of Sinopec's investment in the Alberta oil sands, and focus on minority investments that minimize political controversy.
Sinopec's $4.65-billion (U.S.) offer to buy a 9-per-cent stake in oil sands producer Syncrude Canada Ltd. from debt-laden ConocoPhillips Co. comes as China is widely expected to soon allow its currency, the yuan, to appreciate. A stronger yuan will not only help China control domestic inflation and a potential bubble in its real estate market, but also increase its purchasing power for assets overseas.
If the Sinopec deal wins approval from the federal government, experts expect emboldened Chinese companies to increase efforts to acquire stakes in Canadian mining and oil assets to help feed the booming Chinese economy's massive demand for raw materials.
"The Sinopec deal will be just the tip of the iceberg," said Yuen Pau Woo, president and chief executive officer at the Asia Pacific Foundation of Canada, which studies and promotes trade and investment between Canada and Asian countries.
"China is sitting on huge amounts of foreign reserves and surplus cash. They have already developed a taste for acquisitions and green-field investments overseas, particularly in the resources sector. A stronger [currency]will simply increase their buying power and step up the search for assets in other countries, including Canada," Mr. Woo said.
China has kept its currency pegged at about 6.83 yuan per U.S. dollar for 20 months to help keep its key export sector strong amid the global recession. But a recent warming in diplomatic relations between the United States and China has opened the door for China to allow the yuan, which is also known as the renminbi, to begin rising. Economists and currency strategists expect the renminbi to appreciate against the U.S. dollar by between 2 per cent and 5 per cent this year.
Chinese companies spent a record $32-billion last year investing in mining and energy assets overseas and taking advantage of cheaper valuations due to the global economic downturn.
While Prime Minister Stephen Harper and other government officials have publicly stated that Canada welcomes foreign investment from China, public opinion remains wary of investment by state-controlled firms from China. A study released yesterday by the Asia Pacific Foundation shows that just 18 per cent of Canadians would support a Chinese state-controlled fund or business buying a controlling stake in a major Canadian firm.
That compares to 52 per cent support for the takeover of a Canadian company by a firm from Britain and 41 per cent support by a U.S. entity.
Sinopec's bid for the 9-per-cent interest in Syncrude will require approval from Ottawa under both the Investment Canada and Competition Acts.
"If it goes through, it will be significant in terms of a barometer of Canada's receptivity to Chinese investment. It will be a signal of this government's willingness to accept investment from state-owned companies," Mr. Woo said.