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I’m honoured by your invitation and delighted to be back in Montreal, where I spent my formative years.
At the creation of the Canadian Club movement in the 1890s, its founders adopted a resolution that its purpose was “to deepen and widen the regard of Canadians for their land of birth or adoption and to increase their interest in matters affecting the welfare of their country.”
For more than a century, the Canadian Club of Montreal has pursued that public purpose, and the Bank of Montreal has long supported your objectives. As you know, we’ve been in business in this city since 1817 and, at Confederation in 1867, we provided Canada’s currency. We played a nation-building role in the financing of the CPR in the 1880s and we served as Canada’s central banker until the creation of the Bank of Canada in 1935. We were the First Canadian Bank in many ways, including the first to open branches abroad.
From our founding, Bank of Montreal has played a role in Canada’s mission as a trading nation. Only three months after our founding, we undertook our first foreign exchange transaction in support of trade with China in 1818.
Which brings me to my topic—China Rising. To begin, I’d like to suggest some rules of the road for doing business in China. First, invest the time to nurture relationships; Second, learn the culture and customs of the country; Third, have your own people on the ground; Fourth, have advisers who understand local frameworks and the rights and obligations of partnerships; And fifth, seek the expertise of the Canadian and Quebec governments to open doors for you.
Then I’d like to suggest some elements of comparative advantage for Canadians doing business in China. Canada was among the first western countries to develop commercial and diplomatic links with the PRC. There is a strong cultural presence of entrepreneurial Chinese communities in Canada, traders in our trading nation. Then there’s China’s hunger for energy and natural resources, which Canada owns in abundance. Canada’s expertise in manufacturing and services, including international financial services, is another advantage we bring to the table. And finally there is Canada’s experience in governance, communications and transportation across a vast territory.
From the time I was a student at HEC in the early 1970s, I always thought that we Quebeckers should be more outward looking to the world.
I did my MBA at University of British Columbia, which gave me a window on the Pacific Rim. When I joined the Bank of Montreal in 1972, I was the only francophone among 16 management trainees. I did my first deal in China by accident—I happened to answer the phone when an executive from Boeing called about a problem financing China’s first purchase of Boeing aircrafts. I said, why don’t you do it back to back, you take our risk and we’ll take yours. And the deal was done reinforcing our relationship with China.
I’ve spent 16 years in Asia, beginning in 1973, in Tokyo, Singapore, Seoul and back in Tokyo. I first went to China 25 years ago. It was a very different place in 1981. Men wore only Mao suits that came in only three colours, navy blue, army green or dull grey. Today there are as many fashion choices in China as in New York. Shanghai is the new Hong Kong in terms of the clothing industry. It’s also the new New York in terms of the construction industry. There are more 30-storey buildings in Shanghai today than in New York, most of them built within the last 12 years. A majority of the construction cranes in the world are in China – there are so many of them that they are known as the national bird of China.
Doing business with China is, from our experience, about building relationships in China. Canadian business has a comparative advantage in China because Canada was among the first western nations to establish trade and diplomatic links with the People’s Republic of China. The Chinese honour the memory of two Canadian prime ministers, John Diefenbaker as the first western leader to sell them wheat; and Pierre Trudeau as the first western leader to recognize China in 1970.
With Canada’s first wheat sales to China in 1961, Bank of Montreal became one of the first western banks to establish direct business ties with the Bank of China, and while the BOC is BMO’s principal correspondent in China, we also have relationships with the People’s Bank of China, as well as all of the other major Chinese banks. In 1996, we became the first Canadian bank licensed for a full-service branch in Beijing, and have in addition branches in Guangzhou and Hong Kong, a representative office in Shanghai and a 28% share of Fullgoal, a Chinese mutual fund company. We hope to receive approval this year for another branch in a third Chinese city. And among all banks in China, BMO is the leading market maker in the Yuan – a significant achievement considering our formidable competitors in forex services there. I’ve been to China three times in the last four months. And I’m going back again next week. Believe me, it’s not for the sight-seeing!
The commercial potential of the Canada-China relationship is enhanced by the cultural presence of Chinese communities in major cities across Canada, of which Montreal’s Chinese community is among the most dynamic. Canada is also attracting a wave of up to 40,000 immigrants from China per year, most of them with at least one university degree, all of them with language skills.
In terms of Chinese citizens in Canada on student visas, McGill University alone now welcomes over 400 undergraduate and graduate students a year from China, its third largest source of international students after the United States and France.
Local knowledge is a distinct advantage in doing business in a country where history is measured in millennia, where institutional memory is profound, and where the cultural character of the nation is unique. Companies can and do spend decades cultivating business relationships, joint ventures and partnerships. The investment of time, human resources and money is a significant pre-condition to success in China. But for those willing to make such investments, the rewards can be significant.
Among the large Canadian corporations that are active in China, I especially want to acknowledge three outstanding Montreal-based companies, SNC-Lavalin, Power Corporation and Bombardier.
These companies are direct participants in China’s impressive economic growth. China, as we all know, is a rising economic and political power. It is the world’s next super power, with all that implies for world trade, the environment, security and international relations.
Everyone who visits China comes away with the impression of a country, and a people, on the move. For example, 600 million Chinese now have cell phones. Seven years ago, there were virtually no cell phones in China.
The Chinese economy has been growing at about 10% a year for the last decade, or about three times the growth of Canada’s, and the world’s, economy. China holds about $800 billion of foreign exchange, and is growing by about $200 billion a year. In other words, China’s foreign exchange holdings alone are almost equivalent to the size of the entire Canadian economy.
With a population of 1.3 billion, 20 percent of all the people on the planet, China’s transformation from a command to a market economy has been beneficial for the entire world.
Think about that—the United States market represents 5% of the world’s consumers, and Canada just one-half of 1%. One nation, its economy growing at 10% a year, represents 20% of the consumers on Earth.
This is not the China of which the seminal economist Adam Smith once wrote: “China has long been one of the most fertile, best cultivated, most industrious, and most populous countries in the world. It seems, however, to have been long stationary.”
That was China then, this is now. It has changed a lot.
In China’s new market economy, there are now 2.5 million private firms active in the country, a number increasing by 200,000 companies every year. That means not just the Fortune 500, but countless small and medium-sized enterprises, are doing business there. China has become a major importer and exporter, as well as an important global player in terms of both inward and outward Foreign Direct Investment.
Just to give you a sense of China Rising, here are some highlights of the story from Industry Canada, all figures in US dollars:
Ø By 2003, Chinese imports had increased to more than $410 billion from only $15 billion in 1980. China’s share of world imports over the period increased from under 1% to nearly 6%.
Ø Meanwhile, China’s exports over the same period increased to $465 billion from only $13 billion in 1980. Its share of global exports increased from 2% to 7%.
Ø Attracted by its skilled work force and lower wages, China’s inward FDI stock has grown from $25 billion in 1990 to $500 billion in 2003.
Ø Meanwhile China’s outward FDI increased from $2.5 billion in 1990 to $37 billion in 2003.
That’s a global picture of China’s imports, exports and two-way investment. Now let’s consider the Canada-China story:
Ø Within the last decade, China has first displaced Japan and then Mexico as Canada’s second largest trading partner. China’s share of Canada’s imports has increased from 1% in 1990 to 7% in 2004.
Ø In 2004 alone, our imports from China increased by 30%, for a total of $24 billion.
Ø On the export side, Canada’s sales to China in 2004 were $6 billion, up from over $4 billion, an increase of 40%. However, the growth of the Chinese economy is so strong that our share of imports remained flat at 1.2%.
Even if we do nothing more than maintain our market share, Canada’s merchandise exports to China will reach US$10 billion four years from now and more than $53 billion by 2025. If we were able to double our market share to 2%, our exports to China in 20 years would exceed $100 billion.
China is particularly hungry for energy, as you know.
The Canadian Association of Petroleum Producers suggests the oil sands reserves may exceed 300 billion barrels, which would place Canada ahead of Saudi Arabia in proven oil reserves.
China’s appetite for oil is obvious—according to the International Energy Agency, its consumption of oil is growing by 860,000 barrels a day, over a third of Canada’s current production rate. The recent good fortune of Ottawa and Alberta, and their spiking tax receipts and royalties from record oil prices, is due in no small measure to Chinese demand.
It’s also quite clear that the Chinese are interested in being owners of foreign energy. Given their cash holdings, they’re in a strong position to do so. It is only a matter of time before China takes a stake in our oil patch.
China will also buy as much coal as we can ship by rail to the British Columbia coast and by sea across the Pacific. They are hungry for other natural resources and commodities that Canada owns in abundance. That’s a huge business opportunity for Montreal-based CN and for the CPR, in a way that no one ever foresaw when the Pacific railway was built in the 1880s.
Quebec has a good story to tell in both manufacturing and natural resources. Quebec’s top export to China is in aircraft and parts, led by Bombardier, followed by pulp and copper. Bombardier has sold over 50 aircraft to China, as well intercity rail and subway cars from its transportation division. It has important joint ventures with Power Corporation in northern and southern China.
Quebec companies are among those two million SMEs-- PMEs as we say in French—doing business in China. Poulies-Maska, a leading manufacturer of and designer of V-belt pulleys and related cast iron products, has established a joint venture manufacturing plant in China. Canimex operates a plant in China that produces parts for garage door openers. Companies such as Laperrière Verreault and Future Electronics also have dealings and trade with China. Full disclosure: All are BMO customers. CAE and Pratt & Whitney have used BMO financial services to sell their products into China.
But there’s also a good story to be told in trade in services, including financial services. SNC-Lavalin, Canada’s world player in consulting engineering, has major infrastructure projects in China, including power generation. CITIC, a subsidiary of Power Corporation, is also active in power generation, as well communications, avionics and specialty steel.
I should add that the Canadian government, and the Canadian Embassy in Beijing, have done an excellent job, at the most senior levels, of introducing and assisting Canadian companies in China. I hope that David Emerson, our new Minister of International Trade, will build on his predecessor Jim Peterson’s record of success.
Premier Charest’s Quebec trade mission to China last fall was also an unqualified success.
Foreign invested companies are the major driver of China’s exponential growth in international trade. China’s inward foreign direct invested companies account for more than half of China’s exports.
Canada’s share of China’s inward FDI was $3.5 billion in 2004, according to Export Development Canada. That sounds like a big number, but it represents only about two-thirds of 1% of FDI in China.
There is still plenty of room for Canadian investment in China to grow, especially in a liberalized foreign ownership environment. The government in Beijing is even offering incentives to attract more FDI. Cross-border mergers and acquisitions doubled from 2002 to 2003.
Many of these investments in China are in the form of joint ventures. And here, it’s important to know the local rules of the game. It’s important to know the culture. It’s important to know the customs. It helps to have people on the ground who know the terrain. Nowhere more than China does the saying, “think globally, act locally”, apply. In fact, I think of it as an old Chinese proverb!
It helps to have advisers, including financial advisers, who are established in the market, who understand local legal frameworks, due diligence, and the rights and obligations of partners in joint ventures. Many foreign investors and operating companies still have concerns about transparency, the rule of law, as well as proprietary concerns for intellectual property.
Let me give you one example, among many, of a Canadian company, CCL Label, that set up shop in Guangzhou with the help of our team. We advised them on the most appropriate funding structure – such as bank debt, shareholder loan or equity – given the current exchange control regulations in China. There are limits to loans allowed supported by foreign guarantees. And we helped the company liaise with local regulatory bodies on loans on other regulatory issues. To do business in China, you have to know the local rules.
China may have transformed itself into a market economy, but it is still a one-party state. Already, there are economic cleavages between the bustling cities along the coast and the rural central provinces. There are episodes of unrest that are not reported widely in the West, and the government has a low threshold of tolerance for dissent. But it is one thing to control television, a mass medium, and another to control the Internet, BlackBerrys, iPods and those 600 million cell phones, empowering means of individual communication.
How China resolves its governance issues, and how citizens relate to their government, will be a significant issue going forward. In talking to Beijing, western governments are often conflicted between their desire to do business in China with their hope to advance human rights in China. The two are by no means mutually exclusive; there is nothing to be lost by encouraging China to do what’s right for its own people.
China’s booming exports to the United States do not, at this point, significantly compete with Canada’s exports to our biggest market, although furniture exports from China are obviously a matter of some concern for the industry in Quebec. And while there may be a cost advantage to producing in China, it can never claim Quebec’s geographic advantage—its proximity to the U.S. market, and particularly the Northeast U.S. market of 50 million people.
But the days when Canada has bragging rights to being America’s largest trading partner are clearly numbered. In the month of July 2005, China exported more to the U.S. than Canada did.
Overall, China is already America’s third largest trading partner, with its share of U.S. imports rising from 3% in 1990 to 13% in 2004, while Canada’s share remains steady at 18%. By 2025, China’s share of the U.S. import market will virtually double to nearly 25%, while Canadian exports are expected to remain stable.
The Middle Kingdom is re-born. China, the world’s leading economic power of the 15th century, may well become the leading economic producer of the 21st century. And within our lifetime.
At BMO Financial Group, we’re already part of that future. We invite you join us in making the most of Canada’s Pacific Opportunity.
Thank you very much.
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