Canadian financial leaders urge patience on free-trade talks with China

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Canadian financial leaders are praising federal efforts to open the flow of trade and commerce with China, and preaching patience as recent attempts to launch free-trade talks make slow progress.

Prime Minister Justin Trudeau's trip to China ended in frustration last week as the two sides failed to strike a deal to formally start free-trade talks – which would be a first between China and a Group of Seven country.

But Bill Downe, who retired in November after a decade as Bank of Montreal's chief executive officer and is advising Canada's government on trade, believes the conditions for doing business in China are dramatically improving and that Canada's willingness to show up and engage with Chinese officials "is absolutely essential."

"It's a long game," Mr. Downe said in an interview while he was in Beijing in advance of Mr. Trudeau's trip, adding: "I'm patient … I think we have to commend anyone who's willing to undertake such a venture and recognize that the time to completion of some of these things is not bound by the electoral cycle."

Trade talks with China have taken on new urgency as uncertainty grows that Canada will be able to reach an acceptable deal with the United States and Mexico to redraw the North American free-trade agreement (NAFTA). Yet, Canada's overtures to China have also been met with healthy skepticism at home, where business leaders worry a deal might not meaningfully address existing obstacles to doing business in China, and could put pressure on Canada to compromise its values.

Mr. Downe is adamant that's the wrong approach. "I feel sometimes I'm listening to an isolationist narrative about choosing to do business where good business can be done, which I think is problematic," he said.

BMO is the only Canadian bank with a fully incorporated subsidiary in China, called BMO China Co., and it has roots in the country that date back to the 1800s, when the bank settled trade transactions in silver and gold.

During last week's trip, business leaders from Canada and China joined a roundtable discussion with Mr. Trudeau, and Daniel Barclay, co-head of global investment and corporate banking at BMO Nesbitt Burns Inc., was in the room. He predicts that intensifying Canada's trade flow with China will have "enormous value."

"This will mean more growth for Canadian firms through increased exports, and expanded foreign direct investment will create more jobs," Mr. Barclay said in an e-mailed statement.

Mr. Trudeau visited China little more than a month after President Xi Jinping tightened his control of China's policy-making machine at the Communist Party's 19th National Congress. And with China dealing from a position of strength, Canada's insistence on standards around labour, the environment and gender rights as part of trade talks appears to have been a stumbling block.

In spite of those concerns, Mr. Downe thinks China's regime hasn't received the credit it deserves for cracking down on corruption, for its willingness to make commitments as part of the Paris climate accord, or for reining in GDP growth closer to 6 per cent annually, engineering "a soft landing from an economic growth rate that was not really sustainable."

In the next five years, Mr. Downe expects Mr. Xi will establish new principles to encourage good governance in China, and that the rule of law in commercial matters will mature over time as it is tested by the courts.

"I think that's what has materially changed the prospects for good business in the future," Mr. Downe said. "I think this is a new chapter."

Mr. Downe also sits on a NAFTA advisory council with the ear of Foreign Affairs Minister Chrystia Freeland, and said trade overtures to China are "complementary."

"I'm optimistic that those [NAFTA] negotiations will result in some benefits," he said. "And if an agreement is not achievable … then we'll have to move to another option."

Early in November, China took steps to open its financial sector to foreign firms, announcing it would relax foreign-ownership restrictions of companies in the Chinese banking and securities sectors up to 51 per cent. That is expected to create opportunities for some Canadian financial institutions to assert more control over new investments.

But so far, Canadian firms have been hesitant to discuss any specific competitive pressures or opportunities that the change might bring. For Canadian life-insurance giant Manulife Financial Corp., which entered China before the current investment limit was set and already controls a majority of its business, the impact is expected to be muted.

In mid-November, Manulife launched a wholly owned investment business in Shanghai, and a spokesman said the company is "supportive" of China's liberalization efforts.

Sun Life Financial Inc. CEO Dean Connor also said he is pleased to see China opening its financial sector to greater participation by foreign firms. "While there are a number of strong local and foreign competitors, the sheer size and growth potential for the market creates opportunity, and we continue to see China as an important part of Sun Life's strategy in Asia," he said while on a recent trip to Hong Kong.

Spokespeople for Canada's two largest banks, Royal Bank of Canada and Toronto-Dominion Bank, declined to comment. But Peter Wong, deputy chairman and chief executive of Hongkong and Shanghai Banking Corp. Ltd., a subsidiary of global banking giant HSBC Holdings PLC, said the relaxed foreign ownership rules "are another step in the opening and reform of China's economy."

With a report from Jacqueline Nelson