One country, three systems: Hong Kong firms abroad need help in China

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Canadian companies with Hong Kong parents and China trouble are asking for help in Ottawa. It could be any country next.

In the South China Sea, another conflict is brewing between China and a world power. This one doesn’t involve the military and the United States. Instead, there are gas companies at loggerheads and an energy superpower, Canada, is being drawn in.

While the Canadian companies involved are listed in Toronto, they have strong Hong Kong ties. Husky Oil Canada is a venerable Canadian firm doing everything from exploration to pumping gas into cars. Hutchison Whampoa and Li Ka-shing (李嘉誠) became Husky’s majority shareholders in 1991. Since then, Mr Li and (now) CK Hutchison have continued to invest in the firm and the broader Canadian community. Husky expanded from its Canadian base only after deals with CNPC and CNOOC in the mid- to late 1990s.

Primeline, the second company involved, listed listed on the Vancouver Stock Exchange (later the TSX Venture Exchange) in 1995. It is controlled by Victor Hwang, the former Taiwanese, now-Hong Kong based, businessman of Hong Kong Parkview fame.

Let’s (un)make a deal

The problem is that deals were done when gas prices were sky high and everyone’s calculations are based on those high prices. Banks made loans to Primeline based on the contract it has with its agent CNOOC China Limited (CCL) and customer Zhejiang Gas. Zhejiang Gas, however, is subject to national price controls and is being hammered by Beijing-mandated low prices. Primeline believes CCL hasn’t done enough to collect unpaid fees from Zhejiang Gas and further claims that if payments aren’t forthcoming, it could default on loans to Chinese banks. Jurisdictional arguments about who can force arbitration, where, are underway.

Likewise, CNOOC Gas and Power Group, a unit of China National Offshore, is crying the same blues over payments related to gas from the Liwan 3-1 gas field. The Husky-CNOOC deal does include provisions for adjustments, but only after the first five years of fixed prices.

Fixed price contracts are crucial for ensuring firms have some confidence in moving forward with massive investments in fixed infrastructure. In global markets, hard times have not deterred firms from owning up to their obligations. Reputation risk means that backsliders could be frozen out of future supply. In this region, Japanese and Korean producers have always met their obligations, according to Sanford Bernstein analyst Neil Beveridge (SCMP, 2 May 2016).

China is testing that system of trust. The firms bearing the brunt of that test have appealed to Ottawa, Canada’s capital, for help.

It really is ‘two systems’ – and three

Outsiders who don’t know the intricacies of ‘One Country, Two Systems’, may hear about the occasional protest in Hong Kong, but hey, what government worth its salt hasn’t got protesters on its doorstep every day? Hong Kong is China, after all, and all those Chinese business people are thick as thieves over there, far away, in China – aren’t they? Likely officials in distant Ottawa are wondering how they are getting dragged into this dispute. These companies are controlled by Hong Kong business people, which is China – right?!


The two Hong Kong companies are not the same, but the Canadian companies are indubitably, well, Canadian. Husky has been a national business icon since the 1940s. Husky’s parent company, CK Hutchison, has also invested in Canadian ventures ranging from Park’n’Fly to recently announced uranium investments in Saskatchewan. Mr Li’s personal interests range from his company Horizons Ventures, supporting Toronto green tech (Nanoleaf) to making massive donations to Canadian universities and hospitals through his personal foundation.

Primeline has few Canadian connections beyond their listing, some Canada based service providers, and a non-executive director who attended University of New Brunswick, graduating in 1986. Perhaps maple syrup doesn’t flow in the company veins, but Canadian investors who supported the IPO expect to be paid for the gas that flows through its pipes.

The firms do have other interests in China, but they are commercial ventures that have no connection to some mysterious all-pervasive China web of contacts that can help them in this case. Renegotiating a contract after the fact is a common Chinese business practice that has caused endless heartache to foreign and domestic firms alike. When it happens, the politicking begins and one has to use all the firepower one can muster to prevail.

An American or British company in China in similar circumstances would likewise appeal for their government’s help. Canadian firms ask for government help when seeking US government permissions for pipelines across America, so why not in disputes with state-owned entities in China?

Hong Kong is another system

In a way, it is encouraging that Hong Kong companies feel free to encourage their subsidiaries headquartered abroad to use normal channels of influence to try and resolve semi-political business disputes. It reminds us that Hong Kong has not been absorbed into China and that some degree of “One Country, Two Systems” persists.

The company owners clearly are not overly-concerned about their other wide-ranging business interests in China being negatively or unfairly impacted by their bringing the issues to light. As responsible Canadian listed companies, they are required to report any business risks and major litigation and they have done so. Elevating the issue may even prompt needed reform internally in China.  

Beyond this dispute, Hong Kong companies invested around the world have controlling or minority shares in companies whose home nations may someday have disputes with Chinese entities, SOEs or not, that require them to ask for help. Ottawa will not be the only national capital asked to step in to help similar firms.

Certainly politicians in Canada who were unclear on One Country Two Systems have reason to gain a deeper understanding of the difference between China and pre-2047 Hong Kong. In this instance, they will learn that what they have on their hands are two Canadian companies that need their help, just like any others from the True North, Strong and Free.