California Pension Fund Increased Investment in Chinese A-shares as SEC Tightens Scrutiny of China Stocks

By Jennifer Bateman
Jennifer Bateman
Jennifer Bateman
Jennifer Bateman is a news writer focused on China.
and Ellen Wan
Ellen Wan
Ellen Wan
Ellen Wan has worked for the Japanese edition of The Epoch Times since 2007.
October 1, 2021 Updated: October 1, 2021

America has recently signalled a further tightening of regulations on U.S.-listed Chinese companies and warned investors about the potential risks of investing in these companies.

The Public Company Accounting Oversight Board (PCAOB) on Sept. 22 approved a new framework that requires companies not audited by American audit firms (China Concepts Stocks) to disclose more information to help the PCAOB implement the Holding Foreign Company Accountability Act. The framework will become effective upon approval by the U.S. Securities and Exchange Commission (SEC).

SEC chairman Gary Gensler stressed in late August, and again on Sept. 14, that if China Concepts Stocks do not abide by the rules and do not allow the United States to review their audit briefs within 3 years, they will be delisted from the U.S. stock market as early as 2024.

On Sept. 20, the SEC warned people and institutions who invest in stocks, by pointing out that China Concepts Stocks listed in the United States under a VIE (Variable Interest Entity) structure make U.S. investors invest in a shell company set up overseas rather than a Chinese entity, meaning investors do not own equity in the Chinese entity and thus are potentially exposed to significant risks.

Currently, among companies listed in the United States, only Chinese (including Hong Kong) companies do not allow their original audit documents to be reviewed by the PCAOB on national security grounds.

The head of China’s Securities Regulatory Commission (CSRC) said on Nov. 20, 2020, that this is not a matter of not complying with relevant U.S. laws and rules, but a matter of cross-border regulatory cooperation.

On Aug. 18, Gensler asked the SEC to suspend the listing of Chinese companies in the United States through the VIE structure and reiterated that Chinese companies must allow U.S. regulators to review their original financial audits. Two days later, the CSRC responded by promising to create conditions to promote China-United States audit regulatory cooperation.

Luckin Coffee, the leading Chinese beverage chain listed in the United States, was delisted for falsifying financial figures in June 2020. In April, 2020, Anta Sports, Pinduoduo, and other Chinese stocks were shorted due to suspected financial fraud.

Closed-Door US-China Financial Roundtable

Mike Sun, a U.S.-based private investment adviser, told The Epoch Times that Beijing doesn’t see the SEC’s increased oversight of Chinese Concepts Stocks as necessarily a means of delisting them, but rather as acting in accordance with U.S. laws and regulations to best protect the interests of U.S. investors.

Sun said he believes that the CCP, however, will not give in just because the United States is tightening its grip. Instead, it won’t give ground on issues it considers to be a threat to itself, such as data security. The CCP will engage Wall Street, and Wall Street will continue to act as a middleman for its own benefit.

The CCP recently stepped up efforts to open its financial market to Wall Street, following a closed-door U.S.-China financial roundtable with top Wall Street investment bankers on Sept. 16. As of Sept. 22, three Wall Street firms—Neuberger Berman, BlackRock, and Fidelity—have received approval to set up wholly foreign-owned public fund companies in China.

Beyond The Wall Street titans, international accounting firms, led by the Big Four, will also play a big role, according to Sun.

California Pension Fund

According to Frank Xie, a professor of Business Administration at University of South Carolina Aiken, international accounting firms are turning a blind eye to the CCP’s fake accounts and financial misrepresentations.

Hong Kong-based PricewaterhouseCoopers, the auditor for the recently troubled Chinese company Evergrande, failed to include even one going concern warning when signing off on the company’s 2020 financial report.

Furthermore, the largest U.S. pension fund invested more than $3 billion in Chinese companies as of June 2020, according to the annual investment report 2019-2020 of the California Public Employees’ Retirement System (CalPERS). Of that, over $450 million was invested in 14 Chinese companies with ties to the CCP’s military that the U.S. government has blacklisted.

Xie believes that these big American funds have different ways of investing in China Concepts Stocks than small funds do. They do not necessarily operate through Wall Street investment banks. They have their own operators and can handle themselves in the open market, including the Hong Kong stock market and China A-shares.

For a large fund such as CalPERS, which has more than $400 billion under its management, the choice to invest in Chinese companies is directly related to its managers, Xie said. Meng Yu, the fund’s former chief investment officer, is of Chinese descent and once said his “roots are in China.” Prior to joining CalPERS in January 2019, Meng served as deputy chief investment officer at China’s State Administration of Foreign Exchange, which manages more than $3 trillion in foreign exchange reserves.

Meng abruptly resigned from CalPERS in early August last year. Soon after, the California Fair Political Conduct Commission (FPPC) launched an investigation into two complaints filed against Meng which claimed that he had failed to properly disclose certain personal investments and sales of stocks and other holdings.

Comparing CalPERS’ investment reports for the two fiscal years 2018-2019 and 2019-2020, The Epoch Times found that the fund increased its investment in many Chinese companies during these reporting periods. It also increased its holdings of some H-share companies in Hong Kong and A-share companies in China, particularly China A-shares.

For example, CalPERS’ investment in Alibaba Group Holding Ltd. increased from zero in 2018-2019 to $18.65 million in 2019-2020. Its investment in Alibaba Pictures Group Ltd. increased from $2.62 million to $11.78 million, and its investment in Alibaba Health Information also quadrupled from $2.42 million to $9.84 million.

In addition, CalPERS increased investment in several companies that have been in the news recently, such as Evergrande, the world’s most indebted Chinese real estate company; China Huarong, a state-owned asset management company that was just bailed out by the CCP with a $7.74 billion injection; Alibaba and Tencent, Chinese internet giants that have been successively punished by Xi Jinping, including Tencent Music, which was invested through ADR; BGI, China’s leading gene technology company, which is being questioned for helping the CCP collect and set up a global gene bank; Ping An Insurance that was recently purged by the Xi Administration; Sinophem and Sinovac, which develop and produce Chinese vaccines and assist the CCP’s global vaccine diplomacy.

Among the Chinese companies that received increased investment from CalPERS in the 2018-2019 and 2019-2020 fiscal years, at least six are on a U.S. blacklist that prohibits investment because of alleged CCP military links. These include China Communication Construction A-shares, China Communication Construction H-shares, China National Chemical A-shares, China Mobile Ltd., China Telecom Corp Ltd. H-shares, and China Unicom Hong Kong Ltd.

Jennifer Bateman is a news writer focused on China.
Ellen Wan
Ellen Wan has worked for the Japanese edition of The Epoch Times since 2007.