Canadian Pension Money Keeps Pouring Into China as Risks Escalate

The Canada Pension Plan Investment Board (CPPIB) runs one of the world’s largest pension funds, with assets of $409.6 billion on March 31, as per its 2020 annual report.
Canadian Pension Money Keeps Pouring Into China as Risks Escalate
Alibaba’s co-founder Jack Ma (R) applauds with Tencent Holdings’ CEO Pony Ma during a meeting marking the 40th anniversary of China’s “reform and opening up” policy at the Great Hall of the People in Beijing on Dec. 18, 2018. Holdings in the two Chinese companies are two of the Canada Pension Plan’s biggest investments in publicly traded stocks. (Wang Zhao/AFP via Getty Images)
Rahul Vaidyanath
News Analysis
The Canada Pension Plan Investment Board (CPPIB) runs one of the world’s largest pension funds, with assets of $434.4 billion at June 30. It and two other big Canadian pension funds, including the Ontario Teachers’ Pension Plan, remain strongly bullish on China despite plenty of reasons not to be.

Aside from a number of geopolitical risks, particular challenges with investing in Chinese companies are that some pose national security concerns or may be complicit in human rights violations. They have also been criticized for not being transparent in their financial reporting, and according to Chinese law, may be called upon to serve the needs of the Chinese Communist Party (CCP) at any time.

Another issue is barriers to liquidating investments in China and repatriating the funds.

“The most recent change in tone and aggression of the Beijing government would cause any board to be reviewing its risk analysis,” Liberal MP John McKay told The Epoch Times.

“It’s a far riskier investment. I don’t know how you can arrive with any other conclusion,” he added. “The political risk has changed, so also has the investment risk.”

Chinese law prohibits oversight by foreign entities of the reporting of Chinese companies, creating a worrying lack of transparency for financial markets regulators. The United States is taking steps to institute a level playing field for companies listed on its exchanges by delisting Chinese companies that don’t comply with regulatory requirements, like Luckin Coffee.

Questionable Choices

The CPPIB said in 2018 that it aimed to ramp up investments in China to 20 percent by 2025, even as annual Canadian investment in China has been declining since peaking in 2008.

The CPPIB reported nearly $15 billion (4 percent of the fund) is held in Chinese currency—the renminbi—in its 2020 annual report.

At its fiscal year-end on March 31, the CPPIB held Alibaba shares worth $2.5 billion—its then-largest holding of a single company. The CPPIB has reportedly since accumulated $2.7 billion in another large Chinese company—Tencent—the social media giant that runs WeChat.
Tencent has assisted Beijing in censorship and surveillance, facilitating its human rights abuses, while WeChat is controlled by the CCP and actively spreads disinformation while suppressing information that’s critical of the Party.

In its annual report, the CPPIB highlighted a US$375 million investment in Tencent Music Entertainment Group, an online music platform operator in China.

Conservative MP Garnett Genuis said some checks are needed to ensure that the investments don’t support a company that violates human rights.

“When Canadians have their automatic pension contributions made, they don’t want their money to be put into gross violations of human rights against their will,” he said in a March 16 interview with The Epoch Times.

Genuis said he could invite the pension board to one of the Special Committee on Canada-China Relations parliamentary meetings.

“That’s something we can explore, because we need to make sure that these things aren’t happening and don’t happen again in China and in other places as well.”

The CPPIB’s investments in two Chinese companies that make video surveillance equipment—Hangzhou Hikvision and Zhejiang Dahua—drew criticism from Conservative MP Tom Kmiec last year over their roles in the suppression of Uyghur Muslims.

Both companies are on the U.S. Department of Commerce’s entity list—a list of parties deemed to pose a major risk to national security or foreign policy interests.

The CPPIB told The Epoch Times that they decline to comment when asked if it owns stock in those two Chinese companies.

It was also a major participant in Baixin Bank’s recent stock issuance, according to Chinese media.

China’s banking system is rife with bad loans, and their banks are beholden to the CCP and not their investors, according to a May 27 report by the U.S.-China Economic and Security Review Commission.

“Despite four decades of promised liberalization, the Communist Party-state retains the ability to intervene decisively in China’s banking system to achieve desired outcomes,” begins the report’s summary.

This could take the form of lending to unprofitable state-owned enterprises and running the risk of more bad loans—a conflict of interest that jeopardizes returns for investors.

‘House of Cards’

Beijing desperately wants to hold on to U.S. dollars to buy raw materials and make overseas purchases.

Coinciding with more Chinese nationals and foreign businesses wanting to move money out of China, foreign lenders are less willing to supply U.S. dollars to the slowing Chinese economy. And by design, the Sino-U.S. trade war doesn’t help China either as it impairs the country’s ability to export to the United States and receive dollars.

The renminbi is not far from its weakest level against the U.S. dollar since early 2008. It is caught in a vicious circle as authorities try to stimulate the economy by lowering interest rates, which also reduces the currency’s value.

As of late 2016, firms that wanted to exchange renminbi into U.S. dollars needed approval for any transactions greater than US$5 million. Back then, the European Chamber of Commerce in China told The Wall Street Journal that it was aware of many cases where the new regulatory scrutiny is disruptive to companies’ operations and “exacerbates uncertainties regarding the predictability of China’s investment environment.”
Hayman Capital Management founder Kyle Bass called the Chinese economy a “house of cards” in an interview with American Thought Leaders, a program hosted by The Epoch Times. He mentioned a large unnamed public company that has US$10 billion in cash on its balance sheet. Of that money, US$1.5 billion is in China, and the company has been unable to get it out for four years.

“And so, this is what I worry about: Our pensions and all of the money that China has figured out how to coerce MSCI [Morgan Stanley Capital International] and the various index providers … to weigh China so heavily,” he said.

Bass has long been critical of foreign investments in China propping up the communist state’s economy.

A common strategy for international investing is driven by mimicking indices such as the MSCI Emerging Markets Index, which began including China’s A shares—mainland stocks quoted in renminbi—in 2018 and now has a one-third allocation to China, its largest.

“The investments are clearly at risk of increased scrutiny by the government Beijing. And that will never go well for the investor,” McKay said. “It’s not expropriation, but it is a subtle assertion of power and control over reasonable expectations.”

The Canadian Chamber of Commerce told The Epoch Times that its members hadn’t raised the issue of trouble repatriating funds from China thus far.

Rahul Vaidyanath is a journalist with The Epoch Times in Ottawa. His areas of expertise include the economy, financial markets, China, and national defence and security. He has worked for the Bank of Canada, Canada Mortgage and Housing Corp., and investment banks in Toronto, New York, and Los Angeles.
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