(November 23, 2012) The proposed takeover of Calgary-based oil and gas producer Nexen by China’s state-owned oil giant CNOOC should be nixed by the Canadian government, says Probe International’s Patricia Adams. As instruments of the Communist Party, China’s state-owned enterprises (SOEs) are undisciplined by markets or the rule of law. Without subsidies, their rate of return on equity is negative. It would be impossible to stop them from distorting the Canadian economy, so Canada should just say no to CNOOC.
By Patricia Adams, first published by the Financial Post.
The Canadian government will soon decide whether to let China’s state-owned oil giant CNOOC buy Nexen Inc., the Calgary-based oil and gas producer. A survey released this week shows that 72% of Canadians oppose the prospect of this Chinese Communist Party-led enterprise operating in Canada, with good reason.
China’s state-owned enterprises (SOEs) are controlled by the Chinese Communist Party and their role is political — to keep the Communist party in power. They receive subsidized financing from state-owned banks that receive subsidized savings from captive Chinese citizens who are not allowed to invest their money freely, as we in the West can. SOEs typically receive other subsidies and privileges such as free land, monopoly control over their markets, expedited licences, and exemptions from the need to meet environmental and other standards. In China, a country where the rule of law languishes, China’s SOEs get away with pretty much anything, often at the expense of a bribe to a local official.
Though many are in awe of China’s “rise,” it is a Potemkin village of misallocated capital that, at its root, depends on the suppression of consumer, labour, environmental, and investor rights. Fisher Investments calls it “crony communism.”
That is why researchers at the Transition Institute, a Beijing-based think-tank, want Chinese SOEs privatized and forced to operate according to market discipline and the rule of law, and not by political favour. They are not alone. The Chinese economist, Mao Yushi, the recent winner of the Milton Friedman Prize for Advancing Liberty, calculated that China’s state-owned sector received 7.5 trillion yuan ($1.2-trillion) in subsidies between 2001 and 2009, without which they would have realized a negative average return on equity of 6.3%. The World Bank argues that China’s SOEs represent a problem for China and is calling for their reform into real market-disciplined institutions, not ones that operate by dint of Communist party favours.
Thanks to their status as the “special children” of the Communist party, Chinese SOEs have become flush with cash at the expense of Chinese citizens, who must overpay for everyday products, who must endure the destruction of their environment and the seizure of their land, and who suffer the suppression of their right to sue to defend themselves. Waving cash obtained through such unethical means, Chinese SOEs are now on a shopping spree around the world for investments such as Nexen.
CNOOC’s proposed takeover of Nexen can’t go ahead until the government of Canada approves the $15-billion purchase under the Investment Canada Act, something it can only do if the takeover is likely to be of net benefit to Canada and not injurious to our national security.
The act requires foreign investors to adhere to our standards of free and fair enterprise, and to be accountable under the law. But Chinese SOEs do not ordinarily operate by our standards. They are notoriously secretive, they have inefficient cost structures and low productivity, and it would be virtually impossible to stop them from distorting the Canadian economic environment. Should a political issue arise between Canada and China, the SOEs would necessarily do the bidding of their owners — the Chinese government.
Should a Chinese SOE make money by virtue of its Canadian investments, it will indirectly strengthen its master, the Chinese Communist Party, in its control over ordinary Chinese citizens. If a SOE loses money by its Canadian investments, it will directly hurt ordinary Chinese consumers and taxpayers, who will need to make up the shortfall.
Because of these disbenefits to the Chinese citizenry, reformers in China want the SOEs reformed in much the same way the West has reformed so many of our own SOEs — by privatizing them, as Canada did with Petro-Canada and the U.K. did with British Petroleum. Because of the dubious economic benefit to the Canadian economy from renationalizing key parts of our economy — and with the national being a foreign dictatorship to boot — the government of Canada should simply say no.
To see the World Bank report that criticizes China’s SOEs, click here.