Striking China Gold

Chinese companies seeking “free money” get a rude shock when moving to Vancouver. (Return to B.C.'s Top 100 of 2012.)

Chinese investment | BCBusiness

Chinese companies seeking “free money” get a rude shock when moving to Vancouver. (Return to B.C.’s Top 100 of 2012.)

Chinese investors and entrepreneurs have long considered B.C. a favourite destination, with waves of capital lapping Canada’s Pacific Coast since the late 1800s. Today, with B.C. keen to develop overseas markets for its resources, and China eager to secure raw materials for its growing cities and broaden its presence in global markets, the province remains a destination for aspiring companies.

Recent years have seen ambitious life-science startups such as IND Dairytech Ltd. plant roots here, and growing resource companies including China Gold International Resources Corp. Ltd. join the ranks of the province’s biggest companies.

“There [was] a lot of money coming into China that then had to be parked in some kind of asset,” says Keith Head, HSBC professor in Asian commerce and a professor in the Strategy and Business Economics Division of the Sauder School of Business at UBC. Chinese businesses are “very interested in acquiring ownership positions in the places where they buy resources,” he notes. “That’s the thing that one sees the Chinese talking about and acting upon over and over again.”

But in the case of China Gold, in which the state-owned company China National Gold holds a 39 per cent stake, the location of the company’s head office in Vancouver hinges on the city being in a global centre for mining finance. Its operations are in inner Mongolia and Tibet. Similarly, Hanwei Energy Services Corp., a producer of fibreglass-reinforced piping systems, is headquartered in B.C. but primarily active in China and Kazakhstan.

Kai Li, a colleague of Head’s in Sauder’s finance division, explains that there’s a practical reason why companies from China have set up operations in B.C. While stock markets in China are intended to showcase the country’s companies, which are typically state-owned, they’re also heavily regulated and highly speculative. Turnover is seven to 10 times as much as in North American stock markets, and participation by institutional investors is a mere 10 per cent. In North America, where institutional investors count on stable returns for their clients, institutional involvement is closer to 60 per cent.

But if the shift in companies scouted for this year’s list of B.C.’s biggest companies is any indication, another shift is taking place in the kinds of Chinese companies B.C. is attracting. While a resource company like China Gold jumped up the list on the strength of rising production, other ventures disappeared. Hanwei didn’t exceed the minimum threshold required to be among the province’s Top 100 public companies this year, while life-science company IND Dairytech went the way of Dragon Pharmaceutical Ltd. and was no longer eligible. Both companies went private, in what Li terms “going dark transactions.” Dragon Pharmaceutical principal Yanlin Han took that company private in 2010, and in July 2011 the promising dairy genetics firm IND Dairytech followed suit at a special meeting in Beijing.

While unable to speak to the specific circumstances of these companies, Li explained that many Chinese companies find doing business in North America a shock. It comes as news to owners that the quality of the company matters to investors, and there’s an emphasis on adequate disclosure and proper governance. “It’s a culture shock to them. In China we actually have a terminology for listing in the stock market – it’s called getting money for nothing,” she says. In North America, on the other hand, “they’re faced with sophisticated institutional investors, plus analysts. It’s a wake-up call to them.”

China’s current-account surplus may also limit the number of speculative ventures coming to B.C. China’s current account boasted a surplus of US$60.5 billion in the final quarter of 2011, but in the first quarter of 2012 it more than halved, dropping to just US$25 billion. This is, in part, due to measures designed to make Chinese currency, the renminbi, more responsive to international market forces, as well as changes in trade flows. This means there’s likely to be less foreign currency in the hands of Chinese companies seeking an outlet in markets beyond the country’s borders.

“It’s no longer large in a really noteworthy way,” Head says. Chinese investors “used to have lots of foreign exchange that was just burning a hole in their pockets, and they were trying to figure out what to do with it. Now that issue has contracted; we’re going to see less presence from them.”

But, of course, as with the proverbial price of tea in China, much of the chatter taking place around the activities of the Chinese is, itself, speculative. While there’s interest in capitalizing on the flow of capital from the world’s biggest economy – at least so far as purchasing power goes – Head is reticent to read too much into the shifting presence of Chinese companies in B.C.

“There are things that go on in China that we’ll only understand here a few years later. It’s not a transparent business or government culture,” he says. “There’s stuff going on there that we just don’t understand at the moment.”