More on Grilling Canadian Pension Executives on China Investments

Christine Dobby of the Toronto Star reports Canadian pension fund giants grilled by federal lawmakers over China investments:

Federal lawmakers grilled Canada’s biggest pension fund managers about their continued investments in China this week amid spiking diplomatic tensions between the two countries and ongoing concern about human rights abuse in Xinjiang.

Representatives from five Canadian pension managers, including Canada Pension Plan Investments, appeared Monday evening before a hearing of the special parliamentary committee on the Canada–People’s Republic of China Relationship.

The hearing came just hours after Ottawa ordered a Chinese consular official accused of gathering intelligence on Conservative MP Michael Chong and his family to leave the country. By Tuesday China had responded in kind expelling a Canadian diplomat in Shanghai.

The pension executives said they have invested in China — which is a significant source of growth and makes up about a fifth of the world’s economy by GDP — for the long-term financial benefit of their pensioners.

They generally acknowledged this proposition has become increasingly difficult to balance with environmental, social and governance (ESG) risk as well as concerns about national security, but said they have systems in place to evaluate investments.

All five said they continue to hold investments in China, though an executive from the Ontario Teachers’ Pension Plan reiterated that fund’s recent decision to pause direct, private equity investments in the country. An executive from British Columbia Investment Management added that his fund has made a similar decision.

But even so-called “passive” investments in index funds, a common tool used by Canada’s big pension managers, can lead to stakes that might trouble Canadian pensioners, such as companies on a U.S. trade restriction list or those tied to the forced labour of the Uyghur people in Xinjiang region.

Conservative MP Garnett Genuis questioned the BCI executive about that fund’s stake in Hikvision, a company with alleged ties to facial recognition technology used in the surveillance of the Uyghur minority. (Hikvision has denied these claims.)

Daniel Garant, an executive vice-president at BCI, did not directly answer when asked about whether BCI still holds an investment in the company (in a 2021 disclosure, it was listed as a $57-million stake).

He said that the pension invests in broad index funds and does not directly choose the underlying companies in those funds but added that BCI has been actively working with index fund managers to “improve what they put in it.”

“I wonder if you think that the people you invest on behalf of — teachers, university employees, municipal employees in B.C. — think it’s acceptable that you are defending investments in a company that’s complicit in genocide on the basis that well, you need to diversify your portfolio?” Genuis responded.

“What I would say is we’re not very happy with some of the components of the index and we’re doing something about it,” Garant said.

U.K.-based human rights organization Hong Kong Watch has previously linked other Canadian pension managers’ investments in index funds to stakes in companies tied to human rights abuses in Xinjiang.

MPs also asked the pension executives, which included representatives from the Caisse de dépôt et placement du Québec and the Public Sector Pension Investment Board, for their thoughts on the prospect of new laws that could bar the funds from investing in companies tied to practices such as forced labour or environmental degradation. 

Michel Leduc, senior managing director and global head of public and corporate affairs at CPP, said legislation would be a “blunt” tool that could have the unintended consequences of restricting the pensions’ ability to invest broadly around the world.

Laura Dhillon Kane of Bloomberg also reported that BCI hit pause on China deals as geopolitical pressures escalate:

British Columbia’s public pension manager has paused direct investments in China, the latest institutional investor to rethink its exposure to the world’s second-largest economy due to geopolitical risks.

A senior executive from British Columbia Investment Management Corp. (BCI) revealed the policy during testimony this week to a Canadian parliamentary committee. Ontario Teachers’ Pension Plan has made a similar move, suspending new investments in private assets in China, Bloomberg reported in January.

BCI still has Chinese investments, mostly through public markets and index funds, amounting to less than five per cent of its holdings, the fund said in an emailed statement. “Across our portfolio, BCI has reduced its exposure in China and Hong Kong by approximately 15 per cent over the past two years, including pausing direct investments in China,” it said. BCI had $211 billion in net assets under management at the end of March 2022.

Alright, I wasn't going to follow up on my last comment covering this Special Committee but late this afternoon, I watched the tense exchange between Conservative MP Garnett Genuis and Daniel Garant, BCI's EVP and Global Head, Public Markets.

The first thing that went through my head is who the hell is Garnett Genuis?

He's no genius, that's for sure, and he came across like a Pierre Poilievre wannabe, but a ruder and cruder version.

Pierre Poilievre is grooming his "stars" to act and think like him.

My nickname for Poilievre is "PP" which stands for "Petit Peacock".

The guy is insufferable, loves listening to himself, sometimes he makes excellent points, sometimes he's so far out to lunch it's embarrassing.

But look at his main opponent, an intellectual lightweight who loves posing for cameras and hugging world leaders.

We have this chat group on WhatsApp made up of cynical Greek Canadians and we love tearing into these politicians, including Trump and Biden down south (what a pathetic choice of leaders).

Anyway, back to Conservative MP Garnett Genuis.

What's up with this guy? Garant was very nice and diplomatic, I would have literally fed him his testicles and asked him straight out: "Who the hell are you again? What's your track record, son?

Let me explain something to Canadian politicians, it's not the job of Canadian pension fund managers to create laws forbidding investments in alcohol, tobacco, pot, oil & gas, etc.

Given the limited indexes to invest in emerging markets, there are bound to be issues and they can either invest synthetically to remove questionable companies if it's possible or they work with index providers to remove these companies based on some ESG score.

BCI chose the latter but I can't stand rude politicians who haven't the faintest accusing our pension managers of genocide.

That's total bullshit and grandstanding at its worst.

Again, if I were in Garant's shoes, that little weasel Garnett Genuis would be chewing on his testicles after this ridiculous statement:

“I wonder if you think that the people you invest on behalf of — teachers, university employees, municipal employees in B.C. — think it’s acceptable that you are defending investments in a company that’s complicit in genocide on the basis that well, you need to diversify your portfolio?” Genuis responded.

He followed up with “How do you sleep at night?”.

Dude, have you ever worked at a pension fund? What the hell are you talking about? 

There are ESG screens to screen out these investments but the fault really lies in the index providers for not upping their ESG criteria. Pension funds need index providers as they are benchmarked against them.

Anyway, I beefed up my last comment a bit to reflect the reality of the situation.

No, I'm not big on investing in China. I don't trust communists, period.

But just like Adam Smith once taught us the reason why capitalism works:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely. The charity of well-disposed people, indeed, supplies him with the whole fund of his subsistence. But though this principle ultimately provides him with all the necessaries of life which he has occasion for, it neither does nor can provide him with them as he has occasion for them. The greater part of his occasional wants are supplied in the same manner as those of other people, by treaty, by barter, and by purchase. With the money which one man gives him he purchases food. The old cloaths which another bestows upon him he exchanges for other old cloaths which suit him better, or for lodging, or for food, or for money, with which he can buy either food, cloaths, or lodging, as he has occasion.

I trust in Xi's self-love and he knows he needs the West to hold on to power.

The West also needs China to grow but as that country's demographic crisis continues, it will pose a problem for everyone.

What about war with Taiwan?

I just don't see it. Xi can't risk going head on with the powerful US arsenal and lose face, it will destroy him.

Not saying it's impossible, just highly unlikely (then again, I thought Russia wouldn't invade Ukraine and Putin did it).

I keep repeating the same message over and over, we are heading into a nasty and prolonged global economic recession/ depression.  

What this means is geopolitics will necessarily change.

China will put more pressure on Russia to end the war in Ukraine.

The geopolitical landscape has already changed post-pandemic and it will change a lot more over the next decade.

Navigating this change is challenging, making investing in China a lot harder for Canada's pension funds.

As far as human rights abuses, let's face it, in China, it's hard to really know what is going on.

Hell, Blackstone had no clue what was going on at the slaughterhouses it owns across the US employing children and we expect Canada's large pension funds to know what is going on with their Chinese investments?

Come on, let's get real here.

The world is complex, Chimerica continues to evolve and we need to evolve with it.

If I were to recommend a book to all of you, it's Yanis Varoufakis's The Global Minotaur: America, Europe and the Future of the World Economy.

Varoufakis is a conceited jerk and he was a terrible Greek finance minister and is a terrible politician (yes, sadly, he and Tsipras are still lingering), but that book is excellent.

The one thing I want you to always remember is an economic law: one country's current account deficit is equal to its capital account surplus.

The US has been running current account deficits for years and it has been the primary recipient of massive capital coming form all over the world, funneled into the huge Wall Street machine. 

This will never change and it's the primary reason I only invest in US stocks, not Canadian, Australian, European, Japanese or Chinese stocks but US stocks (I'm also long US dollars over the long run and love the liquidity and diversity of US markets).

And truth be told, since I see a major global recession ahead, I'm short emerging markets here:

You got that? Stay the hell away from emerging markets!!

I'll leave you with some other thoughts on this morning's inflation report, it wasn't that great at all, core inflation remains sticky and the Fed will not be pivoting any time soon unless a major crisis erupts.

In fact, my worst fear is that wage inflation pressures will be picking up in the second half of the year, forcing the Fed to hike once again (that when mayhem will break loose):

So, don't get too excited about "cooling inflation" we are nowhere near the end of the finish line on that front.

Lastly, Senator Clément Gignac sent me this after reading my last comment:

No doubt that big Canadian Pension funds care about ESG principles! Having said that, do they do enough to integrate the National Security concerns from policymakers about investing in non democratic and potential hostile countries with questionable rules of law and human rights protection such China? 

I just want that Maple 8 disclose  their assets exposure country by country and let Canadians pensioners to decide how comfortable they are to scale down Canadian exposure and finance non friendly countries such China! Food for thought

I explained to Clément that Canada’s large pension funds aren’t a democracy, they are mandated to invest in the best long-term interests of their beneficiaries.

But I also said I don’t agree with everything they do on China where there are legitimate concerns.

He replied:

Exactly. Having said that I found interesting the huge divergence exposure approach between CPPIB exposure in China (about 10% exposure) versus PSP ( 3% exposure) and CDPQ (about 2% exposure). As far as illiquid assets (such real estate, infrastructure and private equity), how do you evaluate assets in China in a stress test scenario with potential western countries sanctions  following a potential Taiwan invasion? Just an example! No relevant market price available!

The difference in asset allocation is explained by the different objectives of these large pensions. 

As far as stress testing, he’s right and he’s also right that Canada’s Maple Eight need to disclose a lot more detail on their investments by country and where they invest (public vs private and sectors). It should be part of their annual report and easily accessible information.

Alright, once again, take the time to watch the two panels here,. The exchange between Garant and Genuis takes place around 8:30 p.m. where the latter blurts "quite honestly, I don't know how you sleep at night."

What nonsense! Grow up! You're an elected parliamentarian, start acting like one and realize Canadian pension fund managers have better things to do than get grilled by the likes of you!

The next time you and "PP" want to act like peacocks at these Special Committees, invite me and I'll be glad to serve you some humble pie along with a side order of Greek goat testicles and tzatziki.

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