U.S. regulators' recent moves against the accounting practises of Chinese companies listed in the U.S. are a timely warning about the risks of letting foreign state-owned enterprises (SOEs) play a bigger role in Canada. Prime Minister Harper and the Conservatives will hopefully take these risks into account when they shortly announce their stance on the takeover bids submitted by Petronas (OTC:PNADF) and CNOOC (NYSE:CEO), for Progress Energy Resources (OTC:PRQNF) and Nexen (NXY), respectively.
Chinese auditors and the foreign affiliates of U.S. audit firms are refusing to hand over their audit files to the U.S. Securities Exchange Commission (SEC) on the pretext they might accidentally give away state secrets. They apparently have no choice in the matter - they are bound by Chinese law. Chinese and U.S. authorities have been in talks for years to achieve closer cooperation, but to no avail.
Reuters Breakingviews columnist John Foley says the time to have addressed these issues was when Chinese companies, like Sohu and Sina, began listing on U.S. exchanges more than 10 years ago. A tough stance on accountability might have worked then. "Now the cost of taking a stand is high," observes Foley.
Petronas and CNOOC are effectively backed by the sovereign power of another government, so the potential for flouting Canadian rules is high - as is the potential down the road for tension and conflict between China and Canada. Indeed, as discussed in "Is it too hard to buy Canadian companies?", perhaps Professor Ian Lee and fiscal expert Jack Mintz are right to call for limiting SOEs to minority stakes in Canadian companies, especially if the latter are integral to the economy.