While the return of two Canadians imprisoned in China since 2018 may lead the Canadian government to rethink its relationship with the world’s most populous country, the Chinese market will remain open to Canadian institutional investors, says Jia Wang, interim director of the China Institute at the University of Alberta.

“There is an opportunity for the two sides to reengage in more senior-level exchanges to pave the way for some sort of improvement in the bilateral relationship. But because of how negative the public opinion in Canada has become on China, it will be difficult for bilateral relations to go back to where it was four years ago. There will be a rethink, on both sides, to find a balanced approach going forward.”

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Relations between the Canadian and Chinese governments were derailed in 2018, when Meng Wanzhou, chief financial officer of Huawei Technologies Co., was arrested in Canada following an extradition request from the U.S. government. Though the Chinese government disputes the connection, Wanzhou’s arrest was followed by the detainment of two Canadians, Michael Kovrig and Michael Spavor, in China. Following an agreement with the U.S. government in which she plead guilty to charges of stealing trade secrets and circumventing U.S. sanctions, Wanzhou paid a fine and was returned to China at the end of September. On the same day, Kovrig and Spavor were returned to Canada.

Following the repatriations, Minister of Foreign Affairs Marc Garneau said Canada would look to rebuild its relationship with China on four pillars: the need to coexist, co-operate in global challenges, compete on an economic basis and challenge its government’s human rights record and actions on the world stage.

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According to Wang, both countries stand to benefit from an increased amount of economic engagement. “On one hand, the two economies are quite complementary. There are areas where both countries could benefit from increasing economic engagement. But on the other hand, there are major differences in our values and our government. This type of conflict and major differences will persist into the future.”

While the bilateral relationship may not recover from the dispute in the short term, Wang points out that the Chinese government has been taking steps to make its businesses more attractive to foreign institutional investors. In 2019, regulations limiting the percentage of equity that could be held by foreign investors were scrapped as part of a broader strategy to court investors.

“During the pandemic, China became the world’s No. 1 destination for foreign investment, replacing the U.S.,” she says. “Banks and business are still very open to foreign investment and so is the Chinese government.”

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Institutional investors may be drawn to the Chinese market based on its impressive record of growth, but there are signs of trouble for the Asian economy. According to a recent report from the Organisation for Economic Co-operation and Development, the country is expected to lead the world in GDP growth this year, but to fall behind India’s growth rate in 2022.

More recently, the real estate developer China Evergrande Group’s failure to meet obligations to creditors has sparked concerns about the overall sustainability of the nation’s economy. In late September, the company failed to pay US$83.5 million to foreign bond holders. While it will not be considered in default unless the funds aren’t delivered before the end of October, the Chinese government suspended the trading of Evergrande shares on the Hong Kong stock market.

“It is an interesting case to watch. It is humungous, about US$300 billion, so not a small amount,” says Wang. “It also has 170 banks and investment groups among its creditors linked to it. It is hard to say exactly how it will go down. The potential failure of a big company with a margin of debt is costing investors confidence.”

While Wang believes the situation facing Evergrande and the Chinese economy is serious, she isn’t convinced panic is warranted. She points out that the company is already in the process of restructuring its debt obligations through the sale of its assets.

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“The company actually has a lot of good assets. These assets, though spread thin across 300 cities in China, are of high quality and not likely to devaluate very quickly, so I think there is still a way for this company to turn things arounds.

“Some say Evergrande is too big to fail and it’s why the Chinese government might intervene, but it’s very unlikely for it to take the company over. The more likely scenario will be for the government to have the company to do an audit and ask the it to sell-off enough to make its debt level more manageable.”