OTTAWA—The federal government has rejected the $1.5-billion sale of Aecon Group Inc. to a state-backed Chinese buyer, effectively bowing to fierce opposition to the deal as Canada navigates sensitive trade talks with the U.S.

In a brief statement seen by the National Post Wednesday, Minister of Innovation, Science and Economic Development Navdeep Bains said Ottawa would block the deal for security reasons, adding that Canada is “open to international investment that creates jobs and increases prosperity, but not at the expense of national security.”

Aecon did not immediately respond to a request for comment.

The decision comes after months of intense opposition to the transaction by Members of Parliament, business groups and domestic construction companies, who argued the deal could give China access to sensitive Canadian IP, and would make local firms less competitive in future project bids. Aecon has contracts to carry out refurbishment and maintenance work on various nuclear facilities, as well as build and maintain several telecommunications lines.

The financial holding division of China Communications Construction Co., Ltd. (CCCC) proposed to buy the Canadian construction firm last year. The Chinese state-owned enterprise is 64 per cent owned by the Chinese government.

China observers have said that state-owned enterprises effectively operate as an arm of the Chinese government, exposing Canada to potential risks if given access to sensitive assets.

“SOEs form an integral part of China’s national strategy for global expansion,” Duanjie Chen, a senior fellow at the Macdonald-Laurier Institute, said at a recent event in Ottawa. “That is a major reason why China has created monstrous SOEs through internal mergers in the first place.”

In February, Ottawa launched a full-scale national security review of the transaction. Such probes investigate foreign-led transactions based on whether it will impact Canada’s defence capabilities or create the potential for proprietary technologies to be transferred outside of Canada.

Aecon, for its part, has maintained that its contracts only involve low-level maintenance and construction work, and don’t involve access to classified IP. It has also rejected claims that Chinese state-backed firms would make local companies uncompetitive, arguing that U.S., South Korean and European conglomerates already have a heavy footprint in the Canadian construction space.

Ottawa’s rejection comes as Prime Minister Justin Trudeau looks to forge trade ties with China, and as Canada continues to navigate sensitive talks with the U.S. around the North American Free Trade Agreement.

U.S. officials have been critical of Trudeau’s approval of Chinese state-backed purchases of Canadian technology companies in the past, including the 2017 purchase of Norsat International Inc. by Chinese firm Hytera Communications Corp., Ltd., a privately held company 52-per cent-owned owned by Chinese billionaire Chen Qingzhou.

Norsat had contracts with U.S. Department of Defence, the U.S. Marine Corps, the U.S. Army, aircraft manufacturer Boeing, NATO, Ireland’s Department of Defence, and others. Trudeau also approved the takeover of Montreal-based ITF Technologies, a fibre-laser technology company, by Hong Kong based O-Net Communications in March 2017, reversing a decision by the former prime minister to block the deal.

U.S. officials were less critical of the Aecon acquisition by CCCC, but had suggested a full-scale review was necessary. Aecon has several contracts to install and maintain various telecommunications lines with Bell Canada, some of which traverse the Canada-U.S. border.

“We do have shared infrastructure that needs to be looked at,” said Micheal Wessel, the commissioner of the U.S.-China Economic and Security Review Commission who said he was not speaking on behalf of the government body.

Chinese ambassador to Canada Lu Shaye had said Canada is being too “sensitive” about Chinese capital flows into Canada, and likened the national security review to “looney” behaviour by Canadian officials.

Lu has said in past media interviews that China would accept a rejection of the deal, but said it would expect from Canada a detailed rationale for the decision. The country has long argued that China unfairly faces a deeper level of scrutiny in foreign takeovers than its peers.

“We just hope the Canadian side could adopt the same standard for Chinese companies compared with other foreign companies,” Lu said.

Trudeau failed to kick off official trade talks with China during a recent trip to Beijing, after trying to include various social, environmental and gender-based stipulations into the talks. China rejected those clauses outright and suggested Canada stick with economic and trade-based discussions.

Shares of Aecon, which helped build Toronto’s iconic CN Tower, declined in recent weeks to the lowest since the deal was announced in October on concern that it would be blocked. Aecon’s construction work includes several sectors that could impact national security, including building out the nation’s telecommunications networks.

Aecon closed at $17.34 in Toronto trading Wednesday, 14 per cent below the $20.27 a share offer from CCCC International Holding Ltd. to acquire the construction firm. Before the recent declines, there was widespread speculation in Canada that the deal might be approved as Trudeau sought warmer ties with China.

With files from Bloomberg News