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Scotiabank in China Influences Harper on Nexen

Scotiabank in China Influences Harper on Nexen
Scotiabank’s C$719 million acquisition in China was announced a year ago and initially forecast to be closed last December. Photographer: Brent Lewin/Bloomberg

Bank of Nova Scotia is still waiting to close its purchase of Bank of Guangzhou, seven months after Prime Minister Stephen Harper raised the issue with China’s Premier Wen Jiabao. The delay is weighing on Harper as he considers Cnooc Ltd.’s $15.1 billion bid for Nexen Inc.

Natural Resources Minister Joe Oliver said this week the government’s review of the Cnooc offer will include discussions on “reciprocity” for Canadian companies. Scotiabank’s C$719 million ($726 million) acquisition in China was announced a year ago and initially forecast to be closed last December.

The holdup underscores challenges Harper faces as his government reviews the offer for Nexen, a Calgary-based oil and gas producer. His decision may be a pivotal moment in relations between the two countries as Canadian companies look to establish themselves in the world’s second-biggest economy, and as China seeks access to Canada’s natural resources.

“Either Canada is open for business or it’s not,” said Charlie Fischer, who was Nexen’s chief executive officer until 2008 and sits on the board of Enbridge Inc. “If we turn down all of these transactions, then it seems to me that across the board, Canadian equities will lose value because we’re taking away a significant opportunity for investors to realize gains.”

Nexen shares have remained below Cnooc’s $27.50 per share offer price after jumping more than 50 percent and climbing as high as $26.21 after the agreement was announced July 23. The country’s benchmark Standard & Poor’s/TSX Composite Index is up 0.29 percent this year, compared with a 12 percent gain for the S&P 500 Index.

Soundest Banks

While Canada’s financial system has been rated the world’s soundest by the World Economic Forum for five straight years, its banks and insurers have had difficulty with Chinese ownership limits and slow regulatory approvals for foreign financial institutions, according to a report by the Canadian Chamber of Commerce.

“In China, it does take time to build the trust of regulators and the policymakers,” said William Downe, CEO of Toronto-based Bank of Montreal. Canada’s fourth-biggest bank by assets will get a “significant” boost from its Chinese businesses within five years, Downe said yesterday at a financial services conference.

Harper, who will appear at the Bloomberg Canada-Asia Conference in Vancouver today on his way to the summit of Asia-Pacific Economic Cooperation leaders in Russia, met Wen in Beijing in February, and urged him to approve proposed investments by Manulife Financial Corp. and Scotiabank as part of a broader effort to win greater access for Canadian companies in the Asian country.

“I’ve given up forecasting” when the transaction will close, Brian Porter, Scotiabank’s head of international banking, told investors on an Aug. 28 conference call. When he met China’s regulator in July, “all the comments were positive; it just takes time.”

Asia Strategy

Manulife, Canada’s largest insurer, has said Asia is a key part of its strategy to reach C$4 billion in annual net income by 2015. The Toronto-based insurer, which has had operated on the continent since 1897, is scheduled to hold an investor conference in Hong Kong today to discuss its progress in the region.

Since U.S. President Barack Obama denied TransCanada Corp. a permit in January to build its Keystone XL pipeline -- which would send crude from Alberta’s oil sands to refineries along the Gulf of Mexico coast -- Harper has made it a national priority to sell more oil to Asia. Chinese officials would probably see a rejection of the takeover as an “embarrassing” reversal for Harper, said Wenran Jiang, a political science professor at the University of Alberta.

Investment Welcome

“They would feel a sense of not only disappointment, maybe even a sense of betrayal, because they were assured by the senior leadership at the federal and provincial levels, that Chinese investment will be welcome,” Jiang said in a telephone interview.

Under Canada’s foreign-takeover law, Harper’s government has 75 days to decide whether it will approve the Cnooc-Nexen acquisition.

“Our government will take the time we have to properly scrutinize this transaction” and allow it only “if it is in the long-term interests of the Canadian economy,” Harper told reporters Aug. 23 in Cambridge Bay, Nunavut.

Companies based in China have made 20 investments in Canadian oil and gas companies valued at $33.1 billion over the last decade, led by state-owned enterprises China Petrochemical Corp., PetroChina Co. Ltd., China National Petroleum Corp. and Cnooc, according to data compiled by Bloomberg.

Investment has been tilted toward Chinese purchases in Canada. Canadian direct investment in China was C$4.5 billion in 2011, less than 1 percent of the Canadian total, and less than half the level of investment in Canada by Chinese firms, Statistics Canada data show.

Record Deficit

With 99 percent of oil exports going to the U.S., Canada’s trade deficit with China reached a record C$31.7 billion in 2011, according to Statistics Canada.

Canada has lagged behind other countries in building business relationships with fast-growing Asian countries, said Dominic Barton, managing director of McKinsey & Co. Inc., a New York-based management consulting firm. “The economic weighting of the world is going to Asia, at a very fast pace and a very massive scale, so we need to pivot now,” Barton said in a phone interview yesterday from New Delhi.

Approving the Cnooc bid may alienate those who oppose the transaction, including some of Harper’s own political supporters. While the Canadian government is becoming increasingly comfortable with foreign investment from China, Harper’s former trade minister Stockwell Day said some people are worried that Chinese state-owned enterprises may gain too much influence.

Directly Tied

“There is still concern about what it means to be tied directly to the government in China,” said Day in a telephone interview.

About 57 percent of Canadians say the government should reject the Cnooc bid, according to a poll by Abacus Data released Aug. 23. Only 43 percent of the 2,099 respondents were aware of the takeover before taking the online poll, which was conducted Aug. 10-12.

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