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16 Nov 2012

Digging deep for Canadian treasures

Lindsay Gordon

by Lindsay Gordon

President and CEO, HSBC Bank Canada

Mining tunnel in Canada

China has increased foreign direct investment into Canada

A USD15 billion Chinese bid for a Canadian oil company is dramatic evidence that foreign investors are flocking into Canada, attracted not only by its rich natural resources but by a solid foundation of economic success and fiscal prudence. Trade flows are also growing, and all this makes Canada a core country for HSBC.

China National Offshore Oil Corporation (CNOOC) sealed a definitive agreement to buy oil producer Nexen Inc in July 2012. If the deal succeeds, China’s foreign direct investment into Canada in 2012 will soar above the previous record, increasing mergers and acquisitions flows from China to Canada to more than USD19 billion this year, far above the 2009 peak of USD11.3billion.

Canada’s trade flows, long dominated by the USA, are moving increasingly east and south

It’s important to note that CNOOC’s success depends on convincing the Canadian government that the deal will bring net benefits to Canada. But this is the latest of several large investment moves by Chinese energy companies – including Sinopec’s purchase of select assets from Canadian energy firm Talisman and Petro China’s oil sands purchases as well as CNOOC.

Understandably, there is a vigorous debate in Canada about foreign ownership of natural resources. BHP Billiton’s USD40 billion approach for Potash Corporation of Saskatchewan was rejected by the government last year. But several substantial investments have been approved. The government is due to decide on CNOOC/Nexen in December.

Solid success

2010 2011 2012F 2013F
GDP growth % 3.1 2.8 1.9 1.9
Consumer spending rise % 3.4 2.6 1.6 1.9
Inflation (CPI) % 1.8 2.9 1.5 1.7
Budget balance (% GDP) -2.8 -1.7 -1.1 -0.6
Ten year bond yield % 3.2 1.9 1.8 1.6

Source: Statistics Canada, HSBC estimates
F= forecast

It is particularly interesting for us at HSBC that Canada’s trade flows, long dominated by the USA, are moving increasingly east and south. The US remains an important trading and investment partner, but Canada has recently been invited to join the negotiations for the Trans-Pacific Partnership, a proposed multilateral free trade agreement that seeks to deepen economic ties between Asia-Pacific nations. Since 2006, Canada has concluded new trade agreements with nine countries and has launched free trade negotiations with over 60 others.

Asia’s demand for commodities will be a key driver for Canadian export demand and investment trends in the future. This is not just about oil; China’s share of Canadian lumber exports has quadrupled in five years to more than 20 per cent.

We know that this is how the world economy is changing. HSBC, with its traditional strength in trade and investment finance, intends to play its full part.

Asia’s demand for commodities will be a key driver for Canadian export demand and investment trends in the future

Trade and investment are growing from a solid base. Canada has found its own route to a quiet prosperity that is sometimes overshadowed by its larger neighbour, the USA.

Canada’s banks have emerged from the last four years in good shape, and are now ranked among the strongest global financial institutions.

That is due in large part to some critical decisions that reinforced the country’s reputation for intelligent stewardship, which enabled Canada to steer clear of most of the problems that caused such damage elsewhere.

Essentially, Canada’s banks and regulators kept their heads both before and during the financial crisis. Mortgage lending has remained conservative, and the major domestic banks are supported by a solid foundation of retail deposits – a prudent philosophy that we at HSBC recognise from our own operations.

China’s Canadian deals

Date Acquirer Target Value (USDbn)
Jul 2012 CNOOC Nexen 15.1
Jul 2012 Sinopec Talisman Energy* 1.5
Nov 2011 CNOOC Opti Canada 2.1
Apr 2010 Sinopec Syncrude** 4.6
2009-12 PetroChina Athabasca Oil Sands*** 2.5

* 49 per cent stake in Talisman’s North Sea assets
** 9 per cent stake
*** Stake in two oil sands projects

The outcome has been recognised widely. US President Barack Obama acknowledged, on a visit, that Canada’s management of its financial system has been ‘pretty good’. When former US Federal Reserve Chairman Paul Volcker spoke about US banking reform, he said “What I’m arguing for looks more like the Canadian system than the American system”. This solid stewardship has enabled Canada to maintain healthy economic growth in a difficult global environment.

The long-term economic policy framework is set by the Bank of Canada’s five-year agreement with the government – renewed in 2011 – which sets an annual inflation target of 2 per cent. Core inflation has remained close to the target rate.

Economic growth has been resilient. Our HSBC analysts expect growth of 1.9 per cent this year and next. The Bank of Canada projects 2.3 per cent growth in 2013, taking the economy to full capacity, and 2.4 per cent in 2014. Inflation is expected to remain low.

HSBC is the largest international bank operating in Canada with over 140 bank branches and more than 6,000 employees supporting our global businesses: Commercial Banking, Global Banking and Markets, and Retail Banking and Wealth Management. In fact, Canada was the fifth largest contributor to Group profits before tax in 2010 and 2011, and one of the leading contributors in the first half of 2012. We have achieved considerable profit growth in the last three years. With trade and international investment appearing set for further growth, Canada’s prospects look strong.

Lindsay Gordon retired on 5 January 2013. He was succeeded by Paulo Maia, who was previously Chief Executive Officer of HSBC Bank Australia.

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