Washington Increases Scrutiny of CalPERS Over Chinese Investments

Does supporting Beijing’s agenda serve the best interests of US retirees?

A sign stands in front of California Public Employees' Retirement System building July 21, 2009 in Sacramento, California. (Max Whittaker/Getty Images)

Commentary

The novel coronavirus pandemic has hastened U.S. companies’ efforts to “decouple” their supply chains and operations from China.

Companies were already assessing their dependency on Chinese manufacturers and customers amid the U.S.–China trade war, concerns around intellectual property and corporate espionage, and efforts by Beijing to wean itself off U.S. technology.

But there’s been little momentum around financial decoupling. U.S. investment funds and pension funds—which manage the retirement savings of millions of public employees—have even increased their investments in Chinese companies.

At the center sits the biggest public pension fund in the United States, the $400 billion California Public Employees’ Retirement System (CalPERS) and its Chinese-born Chief Investment Officer (CIO) Ben Meng.

Pension funds’ investments in China could put American retirees at risk and have attracted the attention of the Trump administration. “It’s something we are looking at,” U.S. national security adviser Robert O’Brien said at the Heritage Foundation, a Washington-based think tank, on March 11.

“Some of the CalPERS investment policies are incredibly concerning,” O’Brien said at the event.

“We’ve got folks who are going to rely on their pension for their retirement and putting those investments into companies that don’t have GAAP [generally accepted accounting principles]...and they don’t have the same reporting requirements that American companies do—is scary.”

His comments followed earlier calls by Congressman Jim Banks (R-Ind.) that Meng should be fired, citing Meng’s ties to the Chinese communist regime and his association with a secretive Chinese program to recruit overseas talent—which The Epoch Times outlined in a July 2019 report.

Questionable Investments

At the minimum, pension funds should provide more transparency around their exposure to international markets.

In the CalPERS 2018-2019 Annual Investment Report, the pension fund did not aggregate exposure by country. A search found that CalPERS held 240 individual positions with “China” in the security name as of June 30, 2019, a 40 percent increase from the 172 names in the previous year. The positions span corporate bonds, domestic and international securities, and private investments.

Some of these investments are directly or indirectly supporting the Chinese regime.

As of June 30, 2019, CalPERS held 5.7 million shares in China Communications Construction Co., a state-owned engineering and construction company that has built naval and military bases in the disputed South China Sea.

CalPERS also owns shares in several Chinese state-owned enterprises that are involved in China’s controversial Belt and Road initiative (also known as One Belt, One Road), which has been criticized by Washington as a way for China to spread influence abroad and burden developing countries with unsustainable debt.

The pension fund held 63.1 million shares in China Unicom, a state-owned telecommunications operator providing landline and mobile communication networks. China Unicom provides internet service to the communist regime in North Korea.

CalPERS, as of June 30, 2019, also held shares in Hikvision, a state-owned company that builds surveillance equipment used in concentration camps holding Uyghur Muslim minorities. Hikvision was added to the Trump administration’s blacklist late last year, barring U.S. firms from doing business with the company without government approval. It is unclear whether the fund still invests in Hikvision.

Fiduciary Duty Question

CalPERS has been at the forefront of many pension fund innovations, including a large allocation to alternative asset classes and its fight to lower fees and expenses paid to investment managers.

The pension extols its “sustainable investment program” advocating for ESG (environment, social, and governance) investing and actions to deal with climate change. CalPERS dedicates a webpage to sustainable investing. Its own investment policy states that investments should avoid human rights violations.

It’s difficult to square these touted virtues with CalPERS’ extensive investment activity in China.

This is an inconvenient truth for all asset managers. CalPERS has defended its China investments by referring to a legal “fiduciary duty to provide retirement security” to Californian pensioners.

In other words: we don’t care about ESG if we think it’s a good investment.

Pensioners need to know that their retirement coffers may be at risk. Every major Chinese company, especially those involved in areas of key interest to Beijing, like military, security, and cyber, must answer to the Chinese Communist Party (CCP). The Party agenda and its politics are as deeply ingrained in business as profit-making.

Corporate governance, shareholder rights, and compliance standards are lax in China. Companies aren’t subject to the same stringent financial regulatory standards as U.S. companies.

For example, all corporate records must remain in China. Want to examine a company’s books and records, and its audit work papers? Tough luck—those are deemed “state secrets” according to Beijing. What about internal-control compliance, such as abiding by the Sarbanes-Oxley Act, which U.S. companies are subject to? Nope, doesn’t apply there either.

An example is China Forestry Holdings. CalPERS held 5.3 million shares in the Chinese timber producer but was forced to write off the position—taking a massive loss—after the company was found to have falsified its assets and revenues figures, defrauding investors of the Hong Kong-listed company. The company has now been liquidated.

Enron and WorldCom-type accounting frauds are far more common among Chinese companies and pose a significant risk to investors.

If pension funds simply dismiss these governance risks, what fiduciary duties are they upholding?

Increasing scrutiny led CalPERS to create a webpage on Feb. 19 to further explain its expanding Chinese investments.

Amazingly, CalPERS—one of the most sophisticated institutional investors—passed the buck to stock index operators.

CalPERS cited MSCI and FTSE Russell, two of the most tracked international index operators, for increasing the allocation of Chinese companies in their indices.

The pension argues that its increase in China investments is due to passively tracking the emerging markets indices published by MSCI and FTSE Russell. “This was not an active decision made by us,” the CalPERS page states.

But that defense is problematic. Investment managers tracking an index don’t need to mimic the index 100 percent of the time.

And that’s also not what CalPERS did. An analysis by Yves Smith of finance blog Naked Capitalism on Feb. 25, based on CalPERS' own records, found that contrary to its statement, the pension fund did not just passively follow the index. It constructed its own portfolio away from the index.

In addition to index rebalancing, CalPERS’ increased Chinese allocation during the second half of 2019 is also a conscious decision made by the fund.

Thousand Talents Program

Then there’s the issue of current CIO Ben Meng’s background. In a July 2019 report, The Epoch Times documented how Meng, the person overseeing CalPERS’ investments, had extensive ties to the CCP.

After several years working at CalPERS, Meng was hired by Beijing in 2015 as deputy CIO of China’s $3 trillion State Administration of Foreign Exchange (SAFE).

Meng was recruited under the CCP’s headhunting program Thousand Talents Plan (TTP), which aims to enlist prominent science, tech, and finance talent—both foreign and those of Chinese descent—to work in China. The U.S. Senate Judiciary Committee called TTP one of “China’s non-traditional espionage against the United States” and the program is widely recognized as a danger to U.S. national and economic security.

In a 2017 article in the People’s Daily, the CCP’s official mouthpiece, Meng was quoted as saying, “In human life, if there is an opportunity to serve the motherland, such responsibility and honor cannot be compared to anything.”

This is no simple job switch. One doesn’t become a high ranking official at SAFE for simply being a good investor. SAFE is far more politically sensitive to China than CalPERS is to the United States. As deputy CIO of SAFE, Meng was privy to sensitive information of the CCP and was charged with managing the investments of China’s vast foreign reserves, a duty that Beijing does not bestow upon anyone but the most loyal. In other words, Meng was an important component of the CCP’s national financial apparatus.

After a three-year stint at SAFE, CalPERS hired Meng back as CIO in 2018.

The pension fund and Meng have not responded to a request for comment.

In a statement to the media, Meng acknowledged he was recruited to China via TTP but claims that his ties to the program were severed when he was named the pension fund’s new CIO. But so far, those defending Meng have largely missed the point.

Oaktree Capital Management founder Howard Marks—a legendary Wall Street figure—accused Banks of targeting Meng unfairly, to “impugn someone’s character on the basis of their family’s national origin.” Blackstone Group CEO Stephen Schwarzman—a Trump adviser—called Meng “accomplished” and “a talented investor.”

Marks is right. And Meng may be a very competent and talented investor. But neither defense addresses concerns about the fact that a former CCP insider runs America’s largest public pension fund.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.