Raising the stakes in Canada-China saga

IFR 2060 22 November to 28 November 2014
6 min read
Asia
Jonathan Rogers

CANADA HAS WON the distinction of becoming the first North American country to win a licence to clear offshore renminbi. How fabulous, eh?

To think that just a few months ago the infamous Toronto-listed Sino-Forest protested its innocence in court in the face of charges that painted it as the most egregious fraud in the history of overseas Chinese listings – and there have been many over the past decade or so.

The tale of Canada-China economic synergy and loonie-renminbi currency clearing is a fascinating one, not least because Canada is hoping to ink a free trade agreement with China as it seeks to compete with its commodity-producing rival, Australia. But the Sino-Forest story is even more interesting to me, and could have ramifications in relation to that apparently neat currency tie-up.

The Sino-Forest drama went quiet for a long time after some very loud noise more than three years years ago following claims from “independent research firm” Muddy Waters that the entire enterprise was a carefully crafted scam. The stock collapsed, was suspended and the Royal Canadian Mounted Police – who, er, always get their man – launched a criminal investigation.

A few months ago, finally, there was a hearing in front of a panel of the Ontario Securities Commission. During this hearing, Sino-Forest, which once had the biggest market cap on the Toronto Stock Exchange at around US$6bn-equivalent, defended itself against accusations that the company was a scam of leviathan proportions.

A LAWYER FOR former Hong Kong restaurant manager and Sino-Forest CEO Allan Chan told a hearing at the Ontario Securities Commission in September that “these events did not take place on Bay Street or even rural Ontario. The panel should not draw any conclusions about them as if they did”.

For those not familiar with the geography (or the events), Bay Street is Canada’s equivalent of Wall Street, and is no stranger to cross-border stock market shenanigans. Clearly, though, whatever the locus of the argument, Mr Chan’s lawyer was stating the obvious about cross-border listings in her address to the panel.

If you buy into a forestry company with all its assets in China via a holdco with a Canadian listing, you are not likely to see key corporate events pertaining to that company occurring in Canada, either in a forest in distant British Columbia or in the gossip-filled bars of Bay Street.

Emily Cole, the lawyer in question, has surely produced, in the statement above, one of the most eloquent soundbites ever recorded about the dangers of investing in cross-border equities, whether in Canada’s notoriously colourful stock market or on any other bourse for that matter.

Better to sink real cash into your great auntie’s vegetable patch than risk a forest in distant lands about which you know very little, it seems to me. I’m sure the investors who sank billions into Sino-Forest will agree. Meanwhile, the court proceedings are ongoing.

Whatever the outcome of those proceedings, the entire enterprise and its ignominious wind-down dealt a huge blow to the concept of China cross-border listings, and I doubt any Chinese enterprise of scale will be able to list in Toronto to the same rapturous response that greeted Sino-Forest more than a decade ago.

NOW, CANADIAN REGULATORS are gushing about being the first country in the Northern Americas to be able to clear renminbi without having to go through dollars first. And in case you haven’t noticed, this piecemeal internationalisation of the Chinese unit is proceeding apace thanks to a plethora of similar agreements, most notably in the past month with Singapore.

This all comes as China works to re-draw the economic orthodoxy that has existed since the Bretton Woods agreement of 1945 established the IMF and the World Bank, via establishing an Asian infrastructure bank of which it is the biggest shareholder.

And it’s not just about doing trade with Canada and Singapore in renminbi, but the once sacrosanct agreement that dollars will be used for trade in oil was shredded earlier this month when Qatar signed currency swap agreements with China in renminbi.

The move is widely seen as the beginning of the end for the 40-year-old petro-dollar agreement between the US and the Middle East, and will simply add to the argument that the US dollar is in terminal decline as the global currency of trade and central bank reserves.

But the unthinkable sits on the sidelines: the possibility of China implementing capital controls if a rerun of the Asian financial crisis of the late 1990s emerges, this time in the context of a partially open Chinese capital account.

Capital controls would nullify forward foreign exchange contracts, as well as other crucial FX transactions that will doubtless run into the trillions of dollars if the present pace of the renminbi’s internationalisation continues.

Today’s blissful ability to use renminbi without having to go through dollars and that irksome cost might well turn into tomorrow’s illiquidity nightmare.

Not every transaction that happens with China must necessarily carry a “caveat emptor” clause. But Canada’s gushing about its approval to use the renminbi first must surely strike a chord with those poor local unfortunates who bought Sino-Forest stock and lost their shirts.

For them, anything to do with the internationalisation of Chinese assets carries a stark health warning.

Jonathan Rogers