Canada-China Relations Committee on April 24th, 2023

[The Chair, Liberal, Ken Hardie]

Thank you.

Now we'll go to Mr. Oliphant for five minutes or less.

[Rob Oliphant, Liberal, Don Valley West, ON]

Thank you, Mr. Chair. I want to thank both of the witnesses.

I want to dig a bit into the best approaches to handle an issue that I think all of us around this table agree on. We are concerned that Canadian businesses, Canadian investment companies and Canadian pension funds are investing in vehicles that could be against values that Canadians hold dear. I think we agree on that around the table.

What I'm trying to figure out is the best way of doing that. There's a spectrum, from making things criminal, through to punishable, through to disclosable, all the way to permissible. It's a spectrum that I am sorting through.

I introduced Bill C-441 in 2009, a private member's bill—the place where good ideas go to die. This bill would have required pension funds to disclose investments, divestments or business decisions that had environmental, social and governance factors. The theory was that pension fund holders were put at risk if pension funds had investments in things that were bad, such as environmental degradation or labour practices that were wrong. This is especially so with pension funds, because these are long-term investments, and a pension fund member wants to have the capacity, over a long period of time, to know that their investment in a pension fund is going to yield good fruit. A coup is bad. Environmental degradation is bad. Bad labour practices, from which lawsuits are engendered, are bad. Human rights violations are bad.

Tell me a bit about your instinct on that spectrum of everything from criminal indictments for activities all the way through to permissible and “we don't care”.

This is for you, Mr. Payette, because you advise. I generally think risk-aversion is real, and if people have the right knowledge they will do the right thing, but maybe I'm naive.

[Dr. Alex Payette]

Based on our experience, I can tell you that, even when you provide the information, sometimes it's out of your hands. You can say it, but then the onus of the decision is not on us. Ultimately, the information can be found. You can provide extensive due diligence to certain companies or pension funds, but, again, you can't do anything.

From our perspective, I think the U.S. system is a clear example of how things could be done, that is, working with the regulator to potentially lead to prosecution to a certain degree. Again, you go from one end to the other end of the spectrum. There should be, of course, an in-between, but it should start with extensive due diligence. What can be done and what should be delivered to people holding certain shares in a certain fund? They should be able to know. That is one thing. Now, knowing is not everything. What do you do when you have this information?

Canadian authorities should also potentially have a list similar to the U.S. one regarding companies that should not be held or companies that you should not invest in. I think that could also be a possibility.

[Rob Oliphant, Liberal, Don Valley West, ON]

If I could interrupt, is it “should”? On that spectrum, is it “should not” be invested or “cannot” be invested in?

[Dr. Alex Payette]

When it's directly linked to the PLA apparatus, for example, or places we know have slave labour, forced labour or whatever qualifier you want to put in front of “labour” here, it should be more of a “cannot” invest, because there is clear proof that this is happening on the ground. That's on this end of the spectrum, if this is what you're looking for.

[Rob Oliphant, Liberal, Don Valley West, ON]

I have 30 seconds.

Mr. Arès, do you have any comments?

[Dr. Mathieu Arès]

Keep in mind that the way it works now with many investments, especially in the manufacturing sector, is that contracts or licences are used, or a networked economy is established. For example, how many shoe manufacturing plants does a company like Nike have? None. It uses subcontractors, which are the ones not adhering to labour conditions, health and safety rules for workers, and environmental standards.

There are ways for companies to avoid investing directly in these types of countries but to do business there, and when problems are flagged, the suppliers get the blame. In Canada, think of Joe Fresh. It does exactly the same thing. Makers of cheap goods are operating that way more and more.

The government could decide to punish the companies here, but ultimately, they aren't the ones making the goods. They deal more with designing and importing the goods, so it's pretty tough to say how those companies should be punished.

I agree with my fellow witness's suggestion to prohibit investment in certain sectors. I think that could be achieved through framework legislation. An example here, in Canada, is the Caisse de dépôt et placement du Québec, which was ordered to divest from the fossil fuel sector. That's not easy, given that 30% of Canada's economy is energy-based. These are companies listed on the Toronto Stock Exchange. How do you do that? If you sell off everything, it could cause the market to crash. You are also stuck with your old investments. What do you do? Do you sell them all off?

All of those business considerations come into play. Obviously, it's important to do things on a case‑by‑case basis, or at least to have broad enough measures to allow for sanctions, but it will be pretty difficult to implement, beyond the talk.

[Rob Oliphant, Liberal, Don Valley West, ON]

I'm sorry, Mr. Chair. Next time, I'll give back a minute.

[The Chair, Liberal, Ken Hardie]

Oh, that's okay. We have lots of time. We'll get through the better part of three rounds tonight. There are lots of good questions coming up, and yes, we're giving extra time for the responses because they have been illuminating.

We'll just pause for a second to welcome Mr. Fast and Ms. Sidhu, who are now substituting for some substitutes. These are interesting times here.

Anyway, we will go now to Mr. Trudel for two and half minutes.

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

Thank you, Mr. Chair.

This is really a fascinating discussion.

At the end of the day, there's no way to do these kinds of checks and there's no transparency around our public or private investments in China. No matter who invests in China, there is no way to know what's really going on.

I have a question, and it may seem naive. Why do public and private funds continue to invest in China? Is it lucrative?

[Dr. Mathieu Arès]

It's very lucrative.

China is a market with 1.4 billion consumers and now a middle class, despite the current economic challenges. It's a fast-growing country, so it needs a lot in the way of basic materials, and Canada is a major supplier of those materials.

The Chinese market is attractive to investors. A number of observers, however, are noting a slowdown in China's growth for two reasons. First, China has a rapidly aging population. This week, we learned that India would soon surpass China as the most populous country. Second, China is caught in what's called the middle income trap. It is too expensive for low-skill sectors but isn't technologically advanced enough to compete with high-tech sectors in the west. As a result, we could see the relocation—an exodus even—of low-skill manufacturers to countries such as Vietnam and Indonesia, where really cheap labour is still plentiful. If that were to happen, China might lose some of its allure, but in the short term, its huge market still holds tremendous opportunity. That's why companies continue to do business there.

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

Mr. Payette, did you have anything to add?

[Dr. Alex Payette]

As Mr. Arès pointed out, everything that's been said leads to one overarching conclusion: you can't not do business with the second-largest economy in the world. I realize that values are an important consideration for the committee, and understandably so. Again, though, you can't avoid engaging with the Chinese economy.

Let's look at the ESG factors. Today, although listed Chinese companies are still way behind when it comes to ESG factors, even in the public sector, things are advancing slowly. Today, when the conversation focuses on ESG factors, such as the use of water, electricity and coal, you can't disregard China. You can't talk about ESG matters without talking about China.

The best way to go to avoid any risk is to not do business with China. That is true for most authoritarian regimes. If you don't want to take any risks, especially from a values standpoint, you can't do business in those places. That's important to understand.

On the flip side, the market still holds a lot of profit potential, albeit artificial at times. You have to be very careful not to look at China as a gold mine. You have to be very careful about how and where you invest.

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

You just said something I'm not sure I understood. You said that the profit potential is sometimes artificial. What do you mean by that?

[Dr. Alex Payette]

You have to know how to interpret growth in China. You need access, like us, to debt reports for local governments. You have to understand that China's economy still relies on steel and cement. The country is always launching major Keynesian projects to stimulate growth. Yes, it has a manufacturing industry, but it's important to understand how China's economy is structured. If you take away steel and cement, when certain sectors slow down, everything slows down at the same time—keep in mind the real estate sector, as was mentioned earlier. The country reinvests to recreate economic growth. Eventually, that generates artificial value.

[The Chair, Liberal, Ken Hardie]

We should move on now.

Thank you, Mr. Trudel. You took the extra minute that Mr. Oliphant was going to give me, but that's okay. It's all good.

Ms. McPherson, it's over to you for two and a half minutes or more.

[Heather McPherson, NDP, Edmonton Strathcona, AB]

Thank you very much, Mr. Chair. I hope I can stay in my time frame and not bankrupt your minutes further.

I think one thing I am getting from the testimony is that there needs to be a balance. We need to have a balance in how we deal with investment with regard to China. There is obviously an important role for investment with regard to research and how we exclude China from trade. How do we exclude China when we are talking about things like climate change? We all, at this table, know there is a need.

My first question, which I'll ask of you, Mr. Payette, is whether it is even possible to do business in China using ESG principles. Is that even a possibility?

[Dr. Alex Payette]

With certain listed Chinese companies, yes, you can. Some have very extensive disclosure. Some even have, I would say, compartmentalized disclosure regarding certain manufacturers.

Some companies in China have really top-notch disclosure. Again, I think this is partly due to being listed in the U.S., because it's really constraining now to be listed. You need to disclose much more. That should be an example we should draw on regarding what Canada could do eventually to force more disclosures. Some companies, yes, have really top-notch disclosures.

For some of them, you really need to put in the extra effort to find things. I'm going to circle back to water consumption because this is one of the key elements. We always try to find water consumption. It's really complicated sometimes. Some companies are really lagging behind, but when you know what to look for and when you know where to find it, you can find it.

Again, it's a matter of larger companies versus much smaller companies. It's really going to depend on that, ultimately.

[Heather McPherson, NDP, Edmonton Strathcona, AB]

Thank you.

Mr. Arès, would you like to add to that?

Please go ahead.

[Dr. Mathieu Arès]

It's important to understand where Canadian companies invest and where their strengths lie. Basically, they invest in finance and distribution. With a few exceptions, they don't really invest in manufacturing, where most of the labour and environmental issues occur.

Starting an insurance company doesn't cause a lot of pollution. Generally, an insurance company does not mistreat children. Structuring foreign investment is one of our strengths. We are very active in service and distribution sectors, where the risk of violations is lower. From that standpoint, we are somewhat protected from the issues that arise in manufacturing, where we have less of a presence.

I'm not saying there aren't any problems, but overall, if you look at our main sectors of investment, you see that we have a much larger presence in sectors where socially conscious policies and respect for labour conditions are possible. The simple reason is that those are the sectors where we excel.

[The Chair, Liberal, Ken Hardie]

We'll now move to Mr. Chong for five minutes or less.

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

Thank you, Mr. Chair.

I'd like to follow up with Professor Payette.

Can you tell us if the bans implemented by the Trump and Biden administrations on U.S. investors investing in some 60 PRC-based companies applies to both direct and indirect investments, such as through index funds and the like?

[Dr. Alex Payette]

I think it should apply. I think it does apply to both direct and indirect, yes. It's also a matter of whether you can disaggregate the fund to find it. I think that's the additional difficulty sometimes.

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

If the Government of Canada is going to ban Canadian investors from investing in companies in the PRC that are linked to gross human rights violations, then it seems to me those bans on investment should apply both directly and indirectly, whether it's directly through the purchase of publicly traded securities or indirectly through index funds or other funds that have purchased these publicly traded securities. Do you agree with that theoretical approach?

[Dr. Alex Payette]

Yes, we agree with this theoretical approach.