Finance Committee on Feb. 19th, 2015

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

Do your council's policies make any connections, as the Conservative government did at one point, to the human rights record and trade or are those divided issues for you in our trade relationship?

[Peter Harder]

The Canadian companies that operate in China bring the values of businesses in Canada with respect to how they conduct themselves and how they conduct their working relationships in China. That's an expression of our values in that, while they aren't first and foremost engaged in human rights activity, they're engaged in business. They conduct themselves in a way that I think Canada could be proud of in terms of conducting their businesses in a fashion that is in conformity with both Canadian law and approaches.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Cullen.

We'll go to Mr. Saxton, please.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Chair. Thanks to our witnesses for being here today.

Thank you, Jim, for waking up so early in the morning to join us by video conference. My first question is for you, Jim.

First of all, congratulations on being the first province to issue now two bonds in RMB. You were the first to issue the first one and the second one. In fact, you're probably the first government in North America to do that. I don't know of any other government, including in the United States, that's done that yet, so congratulations.

My question is this. With the new establishment of the RMB trading hub, how will that benefit provinces that wish to issue bonds in RMB going forward?

I understand that you have hedged your currency risk. Now, with the ability to go directly from Canadian dollars into RMB and vice versa, I assume the cost of that hedge would be reduced significantly.

[Jim Hopkins]

Traditionally, when we go into the offshore markets into dollars, or euros, Swiss francs, or Aussie dollars, we're always looking as to how we can swap the liability back into Canadian dollars—that's our traditional approach to the capital markets. We're looking there to solve for savings for the taxpayers, actually, as well as getting the diversity.

In the case of the offshore RMB bond issue we did in 2013 and 2014, in neither case were we able to make the economics work, where we could swap the liability back into Canadian dollars as something that was economic compared to our domestic cost of borrowing at the time. What we did was borrow in RMB and we put those moneys in a secure investment with a high-quality, high-grade entity. It's not really the purpose of the exercise, but in fact we've hedged our FX because we have an investment now that's denominated in RMB, and we're actually generating a positive carry on the investment versus our cost, so we are making a small profit.

The marketplace in offshore RMB, bringing the liability back into the home currency, is something that, for an entity like British Columbia, a high-grade province with very low cost of funds, we're not yet able to make those economics work. Nor, for example, have other entities that have gone into this market, including the United Kingdom, most recently in October 2014; or the World Bank; or KfW, which is the German counterpart to the EDC. They've also issued in renminbi.

That is a current reality of this marketplace, so we did not bring that liability back into Canada. It's not to say we couldn't, but we couldn't do it at a favourable cost for us, from a treasury perspective. What we wanted to achieve, certainly, was the diversity. We wanted to be a first mover in a market that we believe has a very strong future. By getting that name recognition, we think there's a dividend paid to the province, as well as forging that relationship.

[Andrew Saxton, Conservative, North Vancouver, BC]

With a new trading hub here in Canada and the ability to go directly into RMB from Canadian dollars, that may change the economics of your hedge in the future, where it does make sense. Is that correct?

[Jim Hopkins]

Right. I agree. Yes.

What it can also do is generate RMB deposits here in Canada. They'll be looking for more interesting things to invest in, or higher, more safe investments, like British Columbia bonds. There could be a favourable synergy there, too.

[Andrew Saxton, Conservative, North Vancouver, BC]

Right, so you're offering Canadian companies that wish to maintain their RMB positions an alternative, AAA investment vehicle in which to hold their RMB deposits.

[Jim Hopkins]

Exactly.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

My next question is for Mr. Brakel.

Mr. Brakel, how do you see that Canadian businesses will benefit as a result of the new hub? What sorts of savings would they be looking at?

[Hendrik Brakel]

I think the first thing is the direct foreign exchange savings. There are a few businesses right now that are doing business in renminbi, and it's very costly. There are a whole bunch of administrative loopholes to go through because they have to do RMB business through bank subsidiaries in Hong Kong or Singapore. It's a big rigmarole for them. That's why the use of renminbi is so low. I think that less than 5% of companies doing business with China use renminbi.

That's why we're optimistic with having it right here in Canada. They'll speak to their bankers and see the opportunities. They can reach out to their Chinese buyers and suppliers, and say, “Hey, if we do business in renminbi, is there a cost advantage for you?”

What is interesting is that we heard very different views from Canadian businesses. Some were very enthusiastic, “Oh yeah, this is a huge advantage.” Others were saying, “Well, you know, we'll wait and see. We're perfectly happy getting paid in U.S. dollars.”

We think it's good, and what we've seen from other countries' experiences, like the Australians, is a pretty enthusiastic pickup that went up quickly. I think with the Australians, their renminbi deals grew 248% in the first year, so there was pretty quick pickup, but it was from a low base.

We think there would be big advantages for them.

[Andrew Saxton, Conservative, North Vancouver, BC]

Do you see this as being an advantage for Canadian businesses over U.S. businesses?

[Hendrik Brakel]

That's one of the messages we'd heard from exporters. Because a lot of these natural resource deals are so competitive and prices are set globally, it can be an advantage. You know, if I give you 90 days versus 120 days, it can be an advantage.

If you can offer payment in renminbi, it is a big advantage. That's why we're going to make sure that Canada not only can win more trade deals, but that we don't fall behind some of those countries in Europe or Australia that are able to do renminbi deals.

[Andrew Saxton, Conservative, North Vancouver, BC]

I have one very quick question to Mr. Harder.

How will the new hub help Canadian businesses raise capital?

[Peter Harder]

It will only be by making their businesses more efficient and their trade with China more robust. Their business case would make them more attractive investments.

In and of itself, this is just an ingredient. It's not a panacea for a capital raise.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Saxton.

Mr. Dubourg, you have the floor. You have seven minutes.

[Emmanuel Dubourg, Liberal, Bourassa, QC]

Thank you, Mr. Chair.

Good morning to you and also to all of the members of the committee. I also want to greet the three gentlemen who have come here to enlighten us and to help us in the decisions we will have to make.

I will begin with a series of questions for Mr. Brakel.

In your presentation, you showed some enthusiasm for the renminbi. I find this very interesting, but at the same time, I share my colleague's thoughts to some degree.

First of all, you would like to see more trade and you think this will be beneficial for small and medium businesses. Do you also think that there are a certain number of risks for small and medium businesses in Quebec? Do you think we should go toward this type of trade as a priority? Are there any specific risks you would like to point out in connection with the renminbi?

[Hendrik Brakel]

There may be risks for SMEs, but we tell businesses to discuss this with their banker so that he may offer them options and strategies to protect themselves against the risks of a big fluctuation in the currency's value.

To our way of thinking, the idea is to offer a tool. It will be very useful for certain companies, particularly the SMEs who sell electronic commerce tools through Alibaba, as they will be able to receive payments in renminbis. They have to ask their bankers if they are protected in the case of a large fluctuation in the value of the currency. At this time there is a fixed rate, but if there were to be a large fluctuation, will those companies be protected?

[Emmanuel Dubourg, Liberal, Bourassa, QC]

Do you think that all sectors of economic activity will be able to benefit from this, including natural resources?

[Hendrik Brakel]

I think so, yes, but it depends on certain factors. A Chinese buyer may need machines and very specific products. In that case, a price difference of 3% more or 3% less will not matter to him, because he needs that particular product. The price of certain products thus has less elasticity.

We think that this could be really beneficial for SMEs in particular. We spoke to representatives of companies such as Peller Estates Winery, who sell some of the wines they produce in China. It is very advantageous for those companies to receive renminbis rather than always asking for American dollars.

Yes, there are risks, but we think that the advantages will outweigh them.

[Emmanuel Dubourg, Liberal, Bourassa, QC]

Very well. Thank you.

Mr. Harder, my next question is for you.

This is further to what Mr. Hopkins mentioned. In his presentation he talked a lot about promotion and educating businesses.

How can this be promoted so that Canadian businesses are made aware and can benefit from this change?

[Peter Harder]

That is a good question.

My organization has already begun to organize round tables in cities throughout Canada to explain how small and medium enterprises can use this mechanism.

I know that representatives of Canadian banks, and Mr. William Zhu from ICBC, appeared before this committee a few days ago. The banks have already begun to make arrangements with their clients. I would like to add that Premier Couillard and a delegation of SMEs from Quebec visited China in October and this topic came up often in speeches. I think that businesses have begun to appreciate the advantage this initiative can represent.

[Emmanuel Dubourg, Liberal, Bourassa, QC]

You alluded to the premier of Quebec, Mr. Couillard, and that is a good thing. He came to power recently and this was one of his first important trips. We know about the relationship between the federal government and China since 2006. We know that the Prime Minister also met the Dalai Lama. Canada had a great deal of trouble establishing a relationship that allowed for this type of initiative.

In your opinion, has this slowed down Canada to some extent? We know that the Chinese economy is important. Should we have been there sooner and established better relations to facilitate things? Now we are in catch-up mode.

[Peter Harder]

Of course.

Concerning relations with China, that country has always had visits from other politicians. When Mr. Baird was Minister of Foreign Affairs, he visited China on seven occasions. It is an advantage for us to have another Canadian representative who has close relations with our Chinese counterparts. This is true at all levels of government.

Premier Couillard's visit was in the context of the Council of the Federation visit and the other premiers were also present. It was the third time the premiers visited China together. According to our organization, the more the better. We have to have close and constant dialogue.

[Emmanuel Dubourg, Liberal, Bourassa, QC]

Fine.