Finance Committee on Feb. 17th, 2015

[Paul Chilcott]

I think the answer to that is that, as with any investment that a Canadian investor makes in any currency in any jurisdiction, they have to form a view themselves on the risks and returns from the investment. We focus on Canadian financial stability, but investors have to form those views themselves when they're making offshore investments.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

Mr. Gavsie, go ahead.

[C.J. Gavsie]

As Canadians, whether they be buying debt product or equity product anywhere in the world, they are assuming risk from those entities and the way they are regulated in their home-based countries.

As we learn more about the Chinese regulation and oversight of the financial markets, we look for different rated products. Many of the rating groups, such as Standard & Poor's, Fitch, and Moody's, are the same rating companies as manage them. Now, I know there is sometimes a question about whether they are as good as here, but there is a standard. Whether it is the right standard or the wrong standard is not my place to say, but in China there are activities in which those markets are regulated.

We have to be very careful and cautious about where we're putting our money, but there is also heavy demand by all of the institutional investment community, particularly here in Canada, to be able to achieve diversity in their portfolios for Chinese assets. They're hearing that from their investors.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

I am aware of that, but what do we know about China's engagements to automatic information exchange and bank secrecy? Is China engaged in those approaches? We know that the OECD and the EU are active in this regard, but is China engaged in controlling financial exchanges with a view to ending fraud and tax evasion? What do you know about this?

[The Chair, Conservative, James Rajotte]

Mr. Gavsie and then Mr. Stewart.

[C.J. Gavsie]

There is still a very close watch of all of the currency movement in China. For every renminbi and every U.S. dollar that passes over its onshore borders, it is tracking. It is very, very conscious, very cautious, of watching that system from how it internationalizes itself, its economy, so they are continuing to watch flow of funds.

What we have found in examples such as this hub is that they are opening up their borders to allow foreigners to come in and allow Chinese to make their way out, but those dollars are still under regulatory watch, and they have numerous levels of government that are watching those, whether it be through the group called SAFE, State Administration of Foreign Exchange, or CFETS, the China Foreign Exchange Trading System. It is still a very regulated market onshore.

So while, yes, they are demonstrating aspects of their economy to be able to deal more internationally, it certainly is still very much under watch. Those regulators are held accountable, and so far, it does seem to work, but the efforts to be able to decentralize some of the activities are apparent.

[The Chair, Conservative, James Rajotte]

Mr. Stewart, please.

[Rob Stewart]

Yes, I'll just add to that because there were a number of issues raised.

I do not believe that we have a tax information exchange agreement with China. We could confirm that for you, but I don't believe that to be the case. However, China is a member of the G-20 and is actively engaged in the process within the G-20 of looking at the system of international taxation. That work is ongoing through the OECD as an adviser or as a party to the G-20, and that will come to the fore later this year at the G-20 summit.

In respect of the Chinese banking system and the safety of investments, I would echo my colleague Mr. Chilcott on this issue that it's caveat emptor. It's up to the investor to make the decision and take the risk. There is no guarantee or protection afforded by Canada for those investments.

Having said that, we have a dialogue with Chinese officials. China is a very regulated economy and there are a number of regulatory authorities for securities, for banking, and for insurance, and they have a very close watch over the sectors for which they're responsible. There have been a relatively small number of failures or issues where investments have gone bad, and they have typically been in the very high-risk end of the marketplace, the shadow banking part of the Chinese financial system. For the most part, when you're talking about the banks themselves or stocks on the stock exchange, they're very clearly regulated, and the risks are very well known. To the point that Mr. Gavsie made, it's highly likely that a Canadian investor would be in that part of the market and not looking to be taking enormous risks in the shadow banking system.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Dionne Labelle.

Mr. Van Kesteren, please, for your round.

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

Thank you all for being here. It's a very interesting and fascinating discussion.

I want to direct my first question to the Bank of Canada.

In a nutshell, if we dumb this down so that everybody understands what's going on, in the past, trade has been carried out using the U.S. dollar, and of course, the U.S. dollar has had that distinction primarily since World War II.

I guess the elephant in the room is when countries increasingly make these agreements with China to make their transactions directly with that nation, where does that leave the Americans? I mean we're talking about a huge economy, a huge powerhouse, that must guard that privilege fiercely. Where does that leave the Americans? I'm curious if you could just comment on that.

[Paul Chilcott]

There is a lot of speculation, I guess, on the potential growth of the renminbi as a reserve currency. There are other reserve currencies around the world other than U.S. dollars. I think you're more likely to see it used as a reserve currency in an environment where the capital account has been liberalized and, as we talked about earlier, that hasn't happened.

But as I say, it's a world where we already have the U.S. dollar as the major reserve currency, but there are already a range of other currencies that are being used as reserve currencies, and that's really been the case for many years.

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

Is there a power struggle going on with the U.S.? As I said, there were movements, and I think the Chinese have arranged an agreement with the Russians, for instance, to trade directly between their two currencies.

Are the Americans fighting back against this trend?

[Paul Chilcott]

I can't comment on the geopolitics there. The Chinese, as a matter of fact, certainly have swap agreements in place with a large number of countries in different geographical positions.

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

Of course, the advantage that we've had, and I think probably the reason that most countries have been comfortable with the current arrangement, is that in a free and open market system—and some would argue that's becoming quite tainted in the last few years—there is no control on the dollar. The dollar will find its mark, we say.

I am going to go to Mr. Zhu in a second, but is that the case with the Chinese government? Obviously, the federal reserve is not owned by the government; it's owned by the banks. But there are safeguards put in place so that the currency can't be manipulated.

[Paul Chilcott]

Well, right now the renminbi is not a free-floating currency. Its value is influenced by the Chinese authority, and that means that investors or people taking positions in the currency need to take that into account in terms of thinking about their risk exposure.

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

Mr. Zhu, I want to ask you a few questions.

Congratulations on your bank's being the largest bank in terms of assets.

I read, I think it was yesterday, that China has just announced that they've had the largest devaluation in homes, that new-home prices have dropped more than ever before. How does that affect your assets?

[MingXuan (William) Zhu]

Definitely, we provide lots of residential mortgages to Chinese in domestic markets, so if the price of homes dropped dramatically, it would affect the quality of our assets. But so far, I think it's okay, because we try to identify the right borrowers from the low-level borrowers or not-so-good borrowers. We want to keep our assets as safe as possible.

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

The follow-up question would be whether the market has access to your assets sheet. Are they able to analyze that?

Again, there was another interesting article saying that COSCO has decommissioned eight ships. Would the Chinese bank have the paper on those eight ships? Is that something that would reflect on your spread sheet?

[MingXuan (William) Zhu]

China is now going through their securitization; those banking assets allowed us to securitize our assets. It would definitely help our banks to keep a safe and more healthy balance sheet for our further growth.

Actually, the balance sheet of the banks is relatively large. It's not good to just raise the capital and then do more business in the future. So we want to keep a very comfortable balance sheet. Total assets.... Bigger does not stand for stronger. We are pursuing being a leading financial institution in the world.

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

Very quickly, it is probably a no-brainer that everyone moves towards China as your economy continues to grow. We have a mayor in our town who has been actively trying to encourage investment from China, and I applaud him for that.

Can you give an example of Chinese companies that have set up shop in Canada? I'm not talking about the oil sands, but where there's been a company that has moved to Canada and has started a manufacturing process.

[MingXuan (William) Zhu]

Actually, I met a few companies that have established manufacturing in Canada. For example, there are dumpling companies. They produce dumplings. They are located in Edmonton. There are some automotive parts manufacturers. They have acquired a company in Canada to produce auto parts for other manufacturers. Those are the kinds of things they are doing right now.

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

So they're staffing for American automakers.

[MingXuan (William) Zhu]

They require a company in Canada to make auto parts.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Van Kesteren.

Mr. Côté, go ahead for seven minutes.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you, Mr. Chair.

I want to thank the witnesses for being here today.

My question is for Mr. Chilcott, from the Bank of Canada.

I have noted that the memorandum of understanding between the Bank of Canada and the People's Bank of China has remained confidential. So it will not be published. How do you explain this?