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Is China's 'red carpet' era for Canadian business about to end?

Ballard Power Systems says it'll "defer spend in the China market as long as possible."

Canada's Ballard Power Systems is deploying zero-emissions vehicles through partnerships with several  firms in China. (Photo by Fang Zhe/Xinhua via Getty Images)
Canada's Ballard Power Systems is deploying zero-emissions vehicles through partnerships with several firms in China. (Photo by Fang Zhe/Xinhua via Getty Images) (Xinhua News Agency via Getty Images)

As the latest federal budget steps up spending to counter the influence of authoritarian regimes like China within Canada, the world's second-largest economy could become a tougher place for Canadian companies to do business.

Tuesday's budget included new money to create a National Counter-Foreign Interference Office in the Department of Public Safety. It also gave nearly $50 million to the Royal Canadian Mounted Police to increase protections against countries like China, Russia, and Iran. The spending comes as Canadian authorities investigate alleged Chinese interference in Canada's last two federal elections, accusations that Beijing denies.

"There are things that Canadians have no patience for. Election interference is one of those," Sarah Kutulakos, executive director of the Canada-China Business Council, told Yahoo Finance Canada in an interview. "There is no question that should not be happening."

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Canada-China relations have suffered in recent years, due in large part to the nearly three-year detention of two Canadians following the arrest of a top Huawei executive in Vancouver in 2018. But despite the high-level tension, Kutulakos says Canadian companies investing in sectors of China's economy that align with Beijing's goals, such as clean energy, have been treated well.

"The red carpet is out. The governments are trying to make it easy for you," she said.

Vancouver-based fuel cell maker Ballard Power Systems (BLDP.TO)(BLDP) is among the Canadian companies eyeing a larger presence on the ground in China today. The Canadian company is deploying zero-emissions vehicles through partnerships with several Chinese firms.

Business with China isn’t what it used to beSarah Kutulakos, executive director of the Canada China Business Council

Last year, Ballard announced plans to invest about $130 million by 2025 in a new membrane electrode assembly plant at the Jiading Hydrogen Port, located in one of China's leading automotive industry clusters. Ballard says the facility, which will serve as its new Chinese headquarters once built, will lower costs and align with China's fuel cell value chain localization policy.

However, speaking on a quarterly conference call with analysts earlier this month, CEO Randy MacEwen said geopolitical tensions are trending in the "wrong direction." Ballard, he says, will now "defer spend in the China market as long as possible."

Ballard did not respond to a request for comment from Yahoo Finance Canada about potential risks to its Chinese investment plans.

While Beijing has not signalled any direct retaliation against Canadian entities, Kutulakos says the red carpet era may be coming to an end.

"Business with China isn't what it used to be in terms of being easy, because of the geopolitical tension," she said.

Kutulakos points to Australia as a recent example of Chinese economic strong-arming in action. Canada is by no means as economically dependent on China, with just 4.5 per cent of exports bound for the country. However, the tensions between Australia and China bear similarities to Canada's clashes with the country, including allegations of political interference and a ban on Huawei's 5G telecom network.

"Australia has found with iron ore that despite having a free trade agreement with China, they lost access to their market for a period of time," she said. "Sometimes, a fairly arbitrary-seeming decision can be made."

Rachel Ziemba, founder of Ziemba Insights and adjunct senior fellow at the Center for a New American Security, says Canadian companies operating in China are likely to see the government apply a "much wider" set of regulations and restrictions.

"Companies need to prepare to grapple with that now," Ziemba said in an interview, describing the Canada-China relationship today as "not good."

Auto manufacturers Linamar (LNR.TO) and Magna International (MG.TO)(MG) are among the top Canadian manufacturers in China, according to Kutulakos. Each has a significant presence, with the latter employing 35,000 employees across 85 facilities, according to its website.

"Ultimately, the direction of travel is tilted more towards it being more difficult to have cross-border research sharing between companies in China and Canada," Ziemba added.

Speaking prior to the budget's release, she said: "There is a long-delayed conversation about the lack of tools and underinvestment in security and intelligence to solidify Canada's democratic process."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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