Evidence of meeting #66 for Finance in the 41st Parliament, 2nd session. (The original version is on Parliament’s site, as are the minutes.) The winning word was chinese.
A recording is available from Parliament.
Chief, Financial Markets Department, Bank of Canada
The swap is there to be drawn on in case of crisis.
Conservative
Mark Adler Conservative York Centre, ON
I want to turn now to the Canadian institutional investors, such as pension funds, and go back to Mr. Gavsie on this one. This opens up a market for them too, doesn't it?
Managing Director, Global Head of Foreign Exchange Products and China Capital Markets, BMO Capital Markets
Yes.
Managing Director, Global Head of Foreign Exchange Products and China Capital Markets, BMO Capital Markets
China's investment opportunity and investment industry internationalizes and opens itself up. They have one of their pilot programs on right now with the Shanghai exchange as well as the Hong Kong exchange. I believe it's called Shanghai-Hong Kong Stock Connect. That gives the ability for investors in both of those locations to buy and sell securities over the exchanges on each centre without prior approval, whereas before this existed, you would have to go and apply for the ability through various RQFII programs, or vice-versa to get into Hong Kong.
So we are seeing a retail investment demand from that sector come into play through the institutional investor. When I've been referring to the institutional investor, I'm thinking of the people who run our pension funds and mutual funds, not a hedge fund. In my experience, the Bank of Montreal's experience, the hedge fund activity is not looked highly upon, as far as the activity is concerned, and they certainly do not want to see any sort of speculation or short-term investment.
Conservative
Mark Adler Conservative York Centre, ON
We talked earlier about the vision of our government, with the support of the NDP, to arrange for this virtual hub to be created here in Canada. Could you speak about, first of all, what this means for ordinary Canadians? My understanding is that they can now open up an account that contains Chinese currency. Is that correct?
Conservative
Mark Adler Conservative York Centre, ON
In addition, in terms of savings, we've seen growth of trade in yuan go from 2% in 2012 to 8.7% in 2013. This is going to mean significant savings for Canadian companies and those savings can be passed on to consumers.
Number one, this will mean more money in the bank accounts of businesses to reinvest that money to create more jobs and savings for Canadian consumers, stripping out, I think, at the $2.7 billion for an import cost.
Can you speak a bit about that and what benefit that will have on the Canadian economy?
Managing Director, Global Head of Foreign Exchange Products and China Capital Markets, BMO Capital Markets
Despite some of the obvious numerical and financial savings there, we are looking to demonstrate what economic opportunities have arisen from these savings. It's going to be very difficult for us to put our finger on, but we do expect greater globalization by Canadian small and medium-size enterprises. We expect better product, more diverse product being on the shelves for Canadians because of things like this.
Conservative
The Chair Conservative James Rajotte
Thank you, Mr. Adler.
I'm going to take the next round, and I have a number of questions I'll try to get through. I want to follow up on Mr. Adler's questions to Mr. Chilcott on the currency swap agreement. In your opening statement, you said, “it should be underlined that Canadian financial institutions are responsible for the management of their renminbi liquidity needs, including in stressed circumstances, and the Bank of Canada envisages that it would only contemplate lending renminbi as a last resort, and in support of the stability of the Canadian financial system.”
In terms of judging whether it's necessary, will it be the Bank of Canada alone as the institution in terms of determining whether that's necessary? Will OSFI have a role? Will the Department of Finance have a role?
Mr. Chilcott.
Chief, Financial Markets Department, Bank of Canada
In practice, I think one would see dialogue with our colleagues at the Department of Finance and with other federal partners. But coming back to an earlier point, the bar would be very high. As I mentioned, during the last crisis we didn't have the need to activate the U.S. swap, for instance, to lend U.S. dollars. It's very much a last resort. Institutions have to manage their renmindi liquidity, just as they have to manage their liquidity in other currencies, on their own account, including by having plans for stress circumstances.
Conservative
The Chair Conservative James Rajotte
In response to one of Mr. Adler's questions, you said it's not a backstop. But is it not fair to see it as a backstop?
Chief, Financial Markets Department, Bank of Canada
It's there to provide liquidity in extreme circumstances to the financial system as a whole. It would not be a credit backstop for any particular investor.
Conservative
The Chair Conservative James Rajotte
Now, for argument's sake, if a Canadian financial institution is perhaps starting to go down the road of opening themselves up to more risk than is reasonable, is it your role, is it OSFI's role, is it Parliament's again? Is it a combined role?
Chief, Financial Markets Department, Bank of Canada
The Bank of Canada would look at such things from a systemic point of view. But from the point of view of any particular bank, the managing of liquidity risk is OSFI's role.
Conservative
The Chair Conservative James Rajotte
Okay. Thank you for that clarification.
The second item I want to raise is this. Our analysts have provided a very helpful figure for foreign direct investment by Chinese investors in Canada and by Canadian investors in China from 1993 to 2013.
If you look at Canadian investment by China, from about 1993 to 2006 it's less than $1 billion, and it jumps in 2013 to $16 billion. If you look at Canadian investment in China, again in 1993 it is under $1 billion, and until about 2003 it's about $1 billion, I'm guesstimating, and then in 2013 it jumps to $5 billion. So one has certainly jumped much more than the other.
I want to open up to anyone here the question why this has been so. My sense is that setting this up is one answer to addressing this discrepancy, to provide more assurance so that we have more Canadian investment in China.
Who would like to tackle that question?
Mr. Gavsie, please.
Managing Director, Global Head of Foreign Exchange Products and China Capital Markets, BMO Capital Markets
Is that foreign direct investment of Canadians into China?
Conservative
The Chair Conservative James Rajotte
Canadian investment in China is $5 billion; Chinese investment in Canada is $16 billion. In about 2003, they were both under $1 billion. So one has jumped a lot more dramatically than the other.
Managing Director, Global Head of Foreign Exchange Products and China Capital Markets, BMO Capital Markets
I believe the answer is very much tied to the internationalization efforts by the Chinese government. The currency trades within a band. I believe it was in March 2013 that it widened to 2%, so there is more activity in the currency itself. For many years, and I believe in 2005 through 2006, it was still pegged, so it was not moving.
Then, we also have had various ruling changes on what type of foreign direct investment for both countries is permitted, whether it be by Canadians to China or of China to Canada. They also are very restrictive on investments by Chinese companies on their way out of China. It's not that they stop them; they just scrutinize them and put them through an extra layer of analytics.
I believe that will continue to persist. The Chinese, as we found them, want to make sure that their foreign investments are in tandem with other governments' beliefs. When we see some of the larger investments coming into Canada—someone mentioned the CNOOC Nexen deal—a lot of discussion obviously goes on from a competitive standpoint about continued jobs and that sort of thing.
Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance
I might add that I think there are other factors at play. One is the evolution of the Chinese economy in general terms. China is modernizing and becoming a country looking for external investments very quickly.
I believe the raw numbers might also distort the fact that the CNOOC deal was a very large part of that $16 billion. If you were to look at it across the number of transactions, you might get a different reading.
But basically, China's is a much bigger economy, and their FDI flows, in the context of a liberalizing capital account and an increased interest in external investment, are going to dwarf Canadian volumes over time.
Conservative
The Chair Conservative James Rajotte
Will the setting up of this strength have much of an impact in terms of Canadian investment in China?
Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance
That's the difference here. We've obtained the opportunity through the RQFII to do a direct investment into China. It's capped at the moment at $50 billion, which is on a scale that's comparable to those obtained by other centres, but it could grow over time as the Chinese liberalize and, as has been mentioned by our colleague from the ICBC, in due course the Chinese will be fully liberalized, but for the moment we can do something we couldn't do before.
Conservative