Finance Committee on Feb. 17th, 2015

[MingXuan (William) Zhu]

I'm okay.

[The Chair, Conservative, James Rajotte]

Thank you.

Colleagues, I think we have time for a round of four or five minutes.

We'll go to Mr. Cullen, please.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you, everyone.

Mr. Zhu, from the Chinese perspective, is there a clear understanding as to what the foreign and direct investment rules are for Canada vis-à-vis China, particularly with state-owned enterprises? Do you have a solid understanding when you're talking to the SOEs in China as to what the rules are when they're seeking to invest in Canada?

[MingXuan (William) Zhu]

We talk a lot about SOEs, but I would like to say why SOEs go abroad. First, it's because they have the capital, the vision, and the human resources. They still have lots of limits prohibiting them from going abroad, but they have those resources in hand so they go abroad first. I think following their paces, medium-sized companies will go abroad to explore other countries' markets as well. It's not just limited to SOEs.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

My specific question is for a Chinese state-owned enterprise. Is your bank able to advise them as to what the Canadian rules are, limitations or openness?

[MingXuan (William) Zhu]

Yes. Our bank's strategy in Canada is not to compete with the BMO or other big banks. We are not able to do that. We want to fully facilitate our parent bank's capability in China, because we are the largest one, to establish a strategic partnership with local peers to bridge both countries' investment and trade, to help them.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

To give you an example, if you were advising a Chinese state-owned enterprise that was interested in purchasing an energy company in Canada, is that permissible right now under your understanding, an oil company?

[MingXuan (William) Zhu]

Yes, I would like to say it depends on what kind of companies they want to.... You should be prudent. You should understand those different circumstances, but we encourage them. There are still lots of opportunities to invest in Canada.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you.

Mr. Chilcott, to follow up on Mr. Rajotte's question, I know you did not call this a backstop for specific investments. Is it $20 billion or $30 billion that the banks made?

[Paul Chilcott]

It would be 200 billion renminbi or $30 billion Canadian.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

It looks like a backstop, if you follow me, that it's there. It's as you said; it has been made available before but was never used. In the case of some financial crisis, Canada was a mix of great foresight and lucky, in terms of the last major global financial crisis.

China, to me, in terms of understanding the decisions of the Chinese government with respect to their currency, is perhaps less transparent than some of the other trading regimes we've had. Why is it not a backstop? Why make the money available if not for the potential of actually using the money in some crisis?

[Paul Chilcott]

The money would be potentially available to lend on a secured basis to the Canadian system. In that sense the central bank is only ever a provider of liquidity and it lends against collateral. It's a liquidity lender of last resort potentially, but it's not a provider of a credit backstop. That's just the distinction I was making.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

I understand. I'm just trying to imagine. The bank's gone through and made a policy decision to make available this $30 billion under some very restrictive scenarios in which a Canadian financial institution became overexposed to unmanageable risk. I'm trying to imagine a scenario in which—not of course Mr. Gavsie's bank because it's far too smart to do this—but a major risk play that was made in China....

We have a situation where the Chinese housing market severely is undercut for various factors. A Canadian bank is exposed to the point where they don't have the liquidity—stop me at some point where I'm making some scenario that is just not feasible—and the Bank of Canada has got those assets backstopped to prevent a Canadian bank or several banks from outright failure.

[Paul Chilcott]

Well, it would be an issue of credit losses leading to failure. That would be an issue of insufficient capital, whereas the only thing a central bank can deal with would be a liquidity issue rather than a credit issue. If you take the situation of the last financial crisis, some jurisdictions activated their swaps with the U.S. Fed because there was a shortage of U.S. dollar liquidity in their jurisdictions. They weren't bailing out any of those institutions, but they were dealing with a localized liquidity crunch and they were lending on a secured basis in order to do that. If you like, it's the kind of conventional central bank response to dealing with a liquidity crisis. Credit losses leading to insufficient capital are a different kind of crisis management exercise.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Cullen.

Next is a Conservative round, and about three colleagues have indicated. I don't know who's first here.

Mr. Richards, are you first?

[Blake Richards, Conservative, Wild Rose, AB]

Sure. Thank you very much, Mr. Chair.

Unless I've missed it, I don't think I've heard anyone address what I think would be one of the fundamental things, which would be the timeline for setting this up. Obviously there would be a number of features and elements that have yet to be incorporated here, and you've all talked about them to some degree. I know many of them have been incorporated, but can someone give me a sense as to what features have already been put in place, what still needs to be put in place, and what the timelines would be before we would be fully operational?

[MingXuan (William) Zhu]

For the carrying functions, our bank is quite ready. The systems were put into production at the end of last month, so we are preparing with our local peers to open accounts and we are working with OSFI to get the final approval from OSFI. We plan to have the launch ceremony on March 23. This is for the carrying function. It is quite mature—we already have a designation in Singapore, Luxembourg, and Doha before Canada—so our system can fully support our doing that. The carrying function is just a small portion and a fundamental part of the renminbi centre, so based on that, we needed to create more products and services. Our bank is a small portion, and it will be led by the local big banks to provide those kinds of services and products to their clients in Canada.

[Blake Richards, Conservative, Wild Rose, AB]

Thank you.

Mr. Chair, you did mention that there were a few other colleagues, so to give everybody an opportunity, I will give my time to Mr. Van Kesteren.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Chair.

I want to go likewise to a line of questioning similar to the Chair's, and I am going to open this one up as well.

He mentioned that the ratio of investments is about four to one or maybe not quite that. The trade imbalance is also pretty close to four to one. I understand there are things that can be produced much more cheaply in China. I understand the free market system. I'm a big advocate of that system. I think it's one that's given the whole globe a prosperous...especially at this particular time.

However, the question I left with in the last round had to do with what indication we have that the Chinese are going to invest in Canada. What's the upside for us? Let's take away from the investment. I represent an area in southwestern Ontario that has been decimated in terms of manufacturing jobs, so it's incumbent on me to be sure that we can offer the Chinese something that they need from us.

I was talking to the agriculture minister yesterday and he indicated that there are a billion-plus Chinese. If everybody ate another hamburger and drank another beer, we couldn't supply them with what they needed. Where do we see that trade starting to happen? I understand the trade that the banks are involved in, but my constituents understand things at the grassroots level. That's not a difficult thing.

I want to finish off, and I hope you caught the point on those COSCO ships. Those were new ships. There are two stories there. First of all, there is the fact that there are eight decommissioned ships taking goods across. Those goods are coming to North America—and to the rest of the world, I suppose—but at what point will we start to see some of that trade starting to flow our way? When will we start to see the Chinese buying the products we can offer them? I want to know why this particular deal is going to be helpful in that respect.

I'm opening it up to anybody.

[The Chair, Conservative, James Rajotte]

Mr. Hall.

[Peter Hall]

I want to be careful to say that nobody really knows the future, but as career forecasters we try to map those things out as carefully as we possibly can. China is going through a transformation. It's very contingent on the world growth. That's the big question at the moment. When we see a situation where we are seeing ships decommissioned and export trade actually faltering, one has a lot of questions about that.

What we see at the moment, though, is a revived U.S. economy that's taking the lead in the rest of the world. All eyes are on this as to how this growth is going to transmit across to the rest of the world. We're in a waiting game at the moment, so it's very difficult to tell whether China's trade situation is going to resume. It's fundamental to it making then a shift from the trade side towards this consumption-based growth that the government is very keen on seeing. While the uncertainty persists, getting the savings rate down inside of China is inherently difficult, but it's necessary for this to happen

When it comes to constituents here in Canada, I believe there is one trend inside China that really needs our very focused attention; that is, there is an aging of the population problem in China that's impinging on its own ability to produce goods and services for itself and for the rest of the world. This has caused coastal wage rates to be rising in China to the tune of 18% to 19% a year over at least the last six years. China is looking at a new way to invest in the rest of the world to create capacity for itself. It it is on the march looking for resources, looking for people, and looking for a number of different things with very strategic outbound investments.

I believe it's incumbent on us in southwestern Ontario or other parts of Canada to be aware that this is a key trend that is governing Chinese outbound investments in the manufacturing sector in a number of different jurisdictions around the world. I'm not sure of the extent to which this $5 billion in Canada is capturing that, but that's the context.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Van Kesteren.

We'll go to Mr. Brison, please.

[Scott Brison, Liberal, Kings—Hants, NS]

Aside from the obvious natural resource export opportunities to China, what do you see or what does EDC see as areas of growth for Canadian exports to China?

[Peter Hall]

It's an excellent question.

There are a number of different areas that I could go to. In high value-added exports, we have not been present, particularly in the auto sector. Machinery and equipment is a possibility for us, but I think that where our possibilities are perhaps greatest are in the agrifood sector. I go back to the example of everybody eating one more hamburger or drinking one more beer. That characterizes a key problem that China has. When you see the accession to the middle class happening at the rate that it's happening inside China—it's occurring at an annual rate greater than the Canadian population—it's very hard to conceive of the magnitude that we're talking about here.

This increase in wealth increases total consumption, but increases the quality of consumption right away. The place it starts, as far as we can determine, is food. People eat more meat. That's what puts exponential pressure on the world's food supply. I think it's a key driver. We know that China is already very actively pursuing agrifood shipments from Canada back to China.

[Scott Brison, Liberal, Kings—Hants, NS]

Within agrifood, aquaculture and new technologies around sustainable aquaculture and those sorts of areas are of great interest.