Canada’s pension funds ditch Chinese private equity

Canada’s leading pension funds have no plans for private equity investing in China, following a withdrawal from the sector earlier this year. 

 “We paused private investments for some time already – and have focused on liquid markets, which is the majority of our two per cent total portfolio exposure to China. We expect this trend to continue,” a spokesperson for Caisse de dépôt et placement du Québec (CDPQ), the C$400bn ($294bn) group that manages several public pensions and insurance programs in Quebec, told AsianInvestor.

The Financial Times reported in June that the fund had stopped private direct investing in China and closed its Shanghai office, according to people familiar with the matter. 

CDPQ declined to say why it was not considering direct private investing in China.

A spokesperson for Ontario Teachers’ Pension Plan (OTPP), Canada’s third largest pension fund, which manages C$242.5 billion ($178 billion) of assets, (OTPP), told AsianInvestor:

"In recent months, as we assessed the changing post-COVID economic environment, recent regulatory changes in China and the continued deterioration of U.S.-China and Canada-China relations, we reduced our investment activities in China and paused further private investments," the statement said.

The spokesperson declined to say under what – if any – circumstances, private investments would resume.

OTPP Executive Managing Director Stephen McLennan in May told the House of Commons Special Committee on the Canada-People's Republic of China Relationship, a Canadian government committee, that the fund had reduced its stake in investments in Chinese companies more widely.

In April, OTPP shuttered its China equity investment team, based in Hong Kong, in May.

OMERS has allocated 2.5% of its portfolio to China, primarily through public markets and some fund exposure, but does not have any private direct investments in China, told AsianInvestor that it was not considering the sector. It declined to say why.

“We embed ESG considerations into our investment due diligence processes and follow all applicable laws, including sanctions and trade restrictions,” a spokesperson told AsianInvestor.

CHINA CHALLENGES

In recent months, China has restricted work by advisory and consultancy firms, and banned operators of critical infrastructure from buying products of Micron Technology, a US chipmaker, raising concerns about its attitude towards foreign companies.

Western sanctions on more than 9,000 Chinese firms have also create regulatory risks for pension funds in Canada, as elsewhere.

Kevin Yin, an economics PhD student at the University of California, and commentator on Canadian investments in China, said the withdrawal from the illiquid private equity space by Canadian pension funds, signalled their growing concern with the market, including the deterioration of relations between Canada and China, noting that public equities were easier to offload if these concerns are realised.

“In a crisis situation, you'd rather have the option to sell to a centralised public market where trades are constantly being made,” he told AsianInvestor.

Yin believes the funds are likely taking a wait-and-see approach, both in terms of the Canada-China relationship and China's domestic policies.

“It's still an exciting market and I'd assume they want a stake in case the environment improves,” he said.

The moves by Canada’s pension funds come following a sharp acceleration in China allocations over the past decade.

IMF data show that the total investment by Canadian investors in mainland China increased 485% to $39.3 billion in 2022 from $8.1 billion in 2013.

Allocations to the US over this time increased by 235% to $280.9 billion from $119.2 billion, while allocations to the UK increased 397%, to $131.8 billion from $33.2 billion.