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Posted on April 25, 2011
By DUNCAN MAVIN
China wants almost everything Canada has to offerexcept its banks.
That is odd. China craves Canada’s oil, natural gas, rare earth metals and potash. Canada’s resources also include 1.4 million Chinese-Canadians with plenty of guanxi, the personal relationships that grease the wheels of business in China. And Canada’s banks have a solid reputation after coming through the financial crisis relatively unscathed.
Meanwhile, China’s resource-hungry state-owned enterprises have spent more than $10 billion on deals in Canada’s energy and mining sectors in the past 18 months, according to the Asia Pacific Foundation of Canada. China Investment Corp., a sovereign wealth fund, announced plans in January to set up its first-ever overseas office in Toronto. And Canada was the second top target nation, after Brazil, for China’s completed outbound mergers and acquisitions last year, with more than 20% market share, according to Dealogic.
Yet Canadian banks are largely conspicuous by their absence when it comes to deals involving Chinese companies.
In 2010, Bank of Nova Scotia ranked ninth in overall Chinese-outbound M&A. That was due to a single, large deal. You have to scroll right down the rankings to No. 59 to find the next Canadian bank, Royal Bank of Canada, which advised on two deals worth less than $1 billion in aggregate. So far this year, RBC ranks fifth, courtesy of advising Canada’s Encana Corp. on its $5.4 billion investment in a natural-gas joint venture with PetroChina.
Outside advising Canadian clients who own the assets China wants, there is little evidence Canada’s banks have built up the corporate connections needed to create a sustained M&A-advisory business in China.
Part of the problem is a lack of cross-border understanding. RFP Co., a boutique consultancy in Hong Kong, says only six of 70 top executives at the big Canadian banks have any experience living in Asia.
China’s state-owned enterprises tend to favor their own banks or bulge-bracket brands like Goldman Sachs. Relevant expertise, such as mining professionals or geologists on staff, appears to count for less, according to Canadian bankers based in Asia.
Canada’s big fiveBank of Nova Scotia, RBC, Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and Bank of Montrealdo have businesses in China. So far, though, these operations have focused more on wealth management and insurance. Their investment-banking units have tended to focus on deals involving U.S. companiesunderstandable, given that 86% of Canadian deals in 2010 involved only Canadians and Americans, according to a recent report from PricewaterhouseCoopers.
China has spotted Canada’s potential: Chinese acquisition activity in Canada last year was up 392% from the prior peak in 2007, according to PwC. The question for Canadian banks is whether they can mine China’s interest for sustainable advisory fees beyond the mere sale of domestic assets.
Write to Duncan Mavin at firstname.lastname@example.org