Canada-China Relations Committee on April 24th, 2023

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

I would like the chair to voice our displeasure with that, because I've been here for 19 years, and in the last two or three years, the number of committee witnesses who have cancelled their appearances just ahead of meetings is ridiculous. There are 12 of us here. We show up prepared to ask questions and then they don't show up. It's not the first time this has happened.

[The Chair, Liberal, Ken Hardie]

Yes, the chair will have multiple parties receiving his displeasure.

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

Thank you.

[The Chair, Liberal, Ken Hardie]

All right. We'll allow you to start from the top.

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

Thanks, Mr. Chair.

I want to ask if any of the witnesses are familiar with the bans on U.S. investors investing in PRC companies that were implemented by the Trump and Biden administrations.

[The Chair, Liberal, Ken Hardie]

Do you want to direct your question, Mr. Chong?

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

No, it's to either one. It's fine if they don't know the answer. I'm just wondering if they know of the executive orders that were implemented by both President Trump and President Biden that banned U.S. investors from investing in several dozen PRC firms linked either to China's military or to its repressive policies.

[The Chair, Liberal, Ken Hardie]

Dr. Arès, go ahead.

[Dr. Mathieu Arès]

I'm no expert, but generally speaking, this is something the Americans do all the time in the security field. They have a stronger view than Canada on what constitutes a sensitive location and the issue of human rights.

The problem with this type of legislation is that it's more about the rhetoric. What's really tough is the feasibility. As you know, when a Canadian business opens its doors in China, it becomes a Chinese business. It's therefore subject to Chinese law. Businesses are stuck between a rock and hard place. Of course, there may be sanctions from the United States or any other country that has this kind of policy. However, China may also reprimand these countries. It's often very hard for businesses to fully implement this kind of policy. I'm not saying they don't adhere in broad strokes, but like everywhere else, the devil's in the details.

My colleague said something that I totally agree with: It's very difficult to figure out what's public and what's private in China. Let's not forget that Jack Ma just happened to land in a detention centre for six months when he was still head of one of China's biggest companies. No one's heard from him since. Generally speaking, the private sector in China is very clearly subordinate to the Communist Party. In fact, that was one of President Xi Jinping's main thrusts when he took over the new fortunes amassed in recent years. They are reminded that in China, it's the Communist Party that calls the shots, not businesses.

There's still a very grey area. Foreign companies that set up in China are obviously subject to these demands like any other company, otherwise, all of a sudden, they have trouble getting permits and hooked up to electricity, and all sorts of things like that. Obviously, they're going to have a hard time.

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

I have another question.

We heard the testimony of the Hong Kong Watch group. We heard that the Canada Pension Plan, the Caisse de dépôt et placement du Québec and the British Columbia Investment Management Corporation had invested in Chinese companies that had participated in genocide in Xinjiang and engaged in other human rights abuses.

My question is, what tools or instruments can or should the Canadian government use to ban investments in companies committing human rights abuses? Should the Government of Canada be banning Canadian investors, particularly Canadian pension funds, from making investments in those PRC-based firms? If so, what instruments could the Government of Canada use to put that into effect?

[The Chair, Liberal, Ken Hardie]

Dr. Payette, you have your hand up. Do you wish to respond to this?

[Dr. Alex Payette]

Yes, I wish to respond to it.

To make it quick, on the previous question, most of the legal action taken against Chinese companies was linked to military-linked companies. There was a third type of sanction regarding the Department of Commerce, the OFAC and the Bureau of Industry, but mainly these were targeting, potentially, companies that would probably have ties with the military or PLA structure. That was one thing.

The second thing is the report of Hong Kong Watch. We need to understand—and I think it was kind of highlighted—that Canadian financial institutions largely invested in the PRC through equity and debt markets. We would know that most of this remains indirect exposure. I think it was highlighted in the report that sometimes they invest in funds that have investment in companies like—If memory serves me right—Dahua, iFlytek and other companies that do surveillance and drone manufacturing. There might be—

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

It's also index funds like the MSCI index funds.

[Dr. Alex Payette]

Yes.

[The Chair, Liberal, Ken Hardie]

Gentlemen, the time has expired for Mr. Chong's questioning.

We'll now go to Mr. Fragiskatos for six minutes or less.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you, Mr. Chair.

First, thank you for your presentation, Dr. Arès.

My question is about democratic nations who approach investment based on economic values, but also on the values of compassion and fairness, which could be an example for Canada to follow.

For example, in December 2022, our committee heard from a professor who spoke extensively about Germany's approach. Of all the democracies, Germany may have the best approach to investment.

What are your thoughts on this?

[Dr. Mathieu Arès]

I think it's becoming more and more of an accepted practice, especially for public pension funds. We need to have ethical practices. I'm thinking of the Caisse de dépôt et placement du Québec, the federal funds and those of the other provinces, like the Ontario Teachers' Pension Plan. People are starting to adopt ethical practices more and more, including environmentally conscious ones. I wouldn't call it a fad, because you can still make money with an ethical approach to investing.

It always gets a bit more complicated in the private sector. In Canada, we don't have a lot of legal constraints in this area, but I believe we shouldn't be shy about it and there are ways, likely through legal frameworks, to shine a light on certain practices that we consider contrary to our values and the democratic spirit. That said, we need to be careful, because they can be seen as extraterritorial laws.

We can rely on existing rules or treaties with respect to forced labour, for example. Increasingly, these issues are starting to be covered by a number of the treaties that Canada and many other countries are part of. We can use these treaties to say that we need to be careful and that investments are not appropriate if, for example, they're involved with the Uighur labour camps. I feel we can go pretty far in cases like that and even block certain products produced in systematic violation of human rights.

I feel there's some consensus emerging from our international treaties that we could build on to have a somewhat stronger policy on human rights in trade.

I hope I've answered your question to some extent.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Once again, thank you. That's clear.

However, I'm looking for a very concrete example. Is there a country whose example Canada could follow?

Perhaps Dr. Payette has an answer.

[Dr. Alex Payette]

On our end, we rely on best practices. Again, based on what we've seen, it's mostly the United States that will create lists of sanctioned entities that can no longer do business and impose much more burdensome document disclosure requirements.

Of course, in our view, Canadian authorities should play a much larger role in building this apparatus not of oversight, but rather of risk management, in a more comprehensive way. If public organizations linked to public pension funds are making investments on Chinese soil, naturally we want to make sure that we can compel those companies to produce much more comprehensive due diligence reports, monitor the local activities of certain companies, and know who their suppliers, partners and customers are.

Of course, from our perspective, Canada can't go as far as extraterritoriality but it should still force Canadian companies that want to invest to ensure that they comply with certain practices, even if it means adopting a much more restrictive model, such as that of the Americans, where lists are established. Canada should not necessarily be afraid of producing such lists. Canadian authorities could be as proactive as the Americans have been under Donald Trump. Canada could compile a list of the companies that it knows have problematic partners or supply chains. It would be like saying that those companies can no longer do business in certain places or that they could no longer make investments in certain places. It's very restrictive, but it's based on best practices, and that's pretty much where we are today.

Again, we're talking about the country just south of Canada and therefore its direct trading partner. Canada could draw a lot of inspiration from certain measures taken by the U.S. government to kind of reshape the way in which certain Canadian institutions or companies are going to be able to invest in certain countries or territories with authoritarian regimes, for example, whether it's China or other countries.

[The Chair, Liberal, Ken Hardie]

Thank you, Mr. Fragiskatos.

We'll now go Monsieur Trudel for six minutes or less.

[Denis Trudel, Bloc, Longueuil—Saint-Hubert, QC]

Thank you, Mr. Chair.

Thank you so much for being here, gentlemen. You don't know how good it feels to hear two witnesses speak French before this committee. I am very happy to hear from you.

My question will be for both of you.

Carl Breau appeared before this committee in December, I believe. He runs two electronics companies that do business in China. He made a somewhat surprising statement: “Overall, the business environment in China is actually very transparent”. He went on to say: “Most company information is public and readily accessible, including legal records, ownership structures, labour disputes, number of employees, credit ratings, etc.”

I find that a bit surprising, so I'd like to hear from both of you. In your opinion, is any of that true?

Perhaps Dr. Payette can answer first.

[Dr. Alex Payette]

Seek and ye shall find, sooner or later. That's true for us, given our experience, but I don't think it's fair to say the same for everybody. We do research, but that doesn't mean others have the same tools and references.

Also, in the past four to eight weeks, several corporate data compilers have been geoblocked. I have colleagues in Hong Kong who are starting to have trouble accessing reports from companies listed in China.

When you're on the scene, you can access reports. The witness you quoted is not necessarily wrong about some things. There's some transparency with respect to documents. The problem is, it's not always easy to ascertain whether you are looking at all the information. Secondly, it's not always clear that the information in the reports is useful. I don't know how I could explain it to you. For example, Chinese companies put a lot of information in the sections on environmental, social and governance factors, or so-called ESG factors, but this information is not always very useful to people who work in this field and want to understand how these companies manage ESG factors. Yes, some information is available, but is it useful? Not necessarily. Nevertheless I understand what the witness was saying, in essence. You can find useful information, but you have to know how to find it. Even for people based in China, it's not always easy.

So I would put a small caveat on the witness' comment. I've done due diligence for production lines, construction companies and factories, and I can say that it's not as easy as you might think. It's much more complicated. You have to have a very discerning eye when you're looking. If you don't know what you're looking for, you will never be able to find it. Even if you do know, if you don't know how to say it or write it properly, you won't find the information.

[Denis Trudel, Bloc, Longueuil—Saint-Hubert, QC]

Dr. Arès, I'm going to let you complete Dr. Payette's answer by taking you away slightly.

Do investment fund managers in Canada have access to this kind of data? Do they have a research methodology that they can use to get data on the transparency of Chinese companies in which one might want to invest? Does that kind of expertise exist in Canada?

[Dr. Mathieu Arès]

The information is available, but the problem is that, oftentimes, intermediaries are involved. Don't think that all the decisions are made in Montreal or Toronto. In many cases, brokers on the ground conduct audits to uncover good investments. It works a bit like that.

As for transparency, it's important to know—

[Denis Trudel, Bloc, Longueuil—Saint-Hubert, QC]

Forgive me for interrupting, but do you mean that public investment funds in Canada also do business with private investors?