CPPIB ups China exposure amid mainland exodus

Despite a generally bearish outlook on China among investors globally, Canada’s second largest pension plan is going against the grain, having increased its allocation to a Chinese logistics company last week.

The Canada Pension Plan Investment Board invested $400 million in Goodman China Logistics Holding, an 80/20 fund joint venture with Australia's Goodman Group that invests in warehouse and logistics distribution centres in China.

This latest allocation brings the C$183 billion ($177 billion) retirement fund's total investment in Goodman China to C$2.6 billion, and CPPIB is mulling further investment in the mainland through joint ventures, direct investments or funds.

“The existing portfolio has performed strongly, and for a long-term investor like CPPIB, the fundamentals of the logistics sector in China continue to be compelling,” a CPPIB spokeswoman tells AsianInvestor. “These factors include continued long-term economic growth with increasing domestic consumption power driven by a growing middle class and continued strong demand for modern, upgraded logistics facilities.”

While not the only firm citing long-term opportunities in China, CPPIB’s optimism comes at a time when sentiment is overwhelmingly negative, spurred by Shibor rates spiking to a record 13% in June, with the central bank giving no indication it would inject liquidity into markets as it aims to curb risky lending.

Volatility has ensued – Shanghai’s CSI300 is down some 8% year-to-date, while Chinese mutual funds suffered a 12.5% decline in assets in the first half of 2013. Some asset managers believe a recession is on the horizon, with one describing China as a "crash waiting to happen". Others have been rotating out of Asian equities and into cash.

Yet CPPIB – which has C$22.5 billion invested in real estate, private equity, private and real estate funds and direct investments in Asia Pacific – maintains that recent volatility has not changed China's long-term story and will continue to invest selectively in the mainland.

Gauging the situation in China is essential, says Philip Pearce, Goodman's managing director for Greater China, noting that both CPPIB and Goodman are “keeping a watchful eye on market fundamentals and demand” to ensure they avoid overbuilding in certain markets.

But he echoes CPPIB’s sentiment, arguing that opportunities for logistics companies such as Goodman China are excellent.

“Obviously there have been food safety concerns in China in recent years," Pearce tells AsianInvestor, pointing to the 2008 powdered milk scandal. Tainted powdered milk led to several infant deaths and made thousands sick on the mainland five years ago.

Since then, demand for imported powdered milk has surged, he says, as the "middle class is becoming more discerning and are prepared to pay premiums for imported products".

At the moment, there are not enough warehouses to store these materials, which is where Goodman China steps in, Pearce says. The firm recently signed over 100,000 square metres of new leases for projects in Tianjin, Kunshan and Shanghai, and is busy securing an additional 500,000 square metres for new projects. (Goodman Group’s investment in the JV totalled $100 million last week.)

CPPIB’s recent investment fits in with its overall growth plans in Asia, which include potentially increasing its regional allocation by as much as 700% over the next two decades. That will depend on factors such as how well the fund invests the money, what inflows are like and how investable China becomes.

"We see a strong pipeline of attractive assets to add to the portfolio [and] we will continue to pursue investment opportunities in this region to benefit from its strong projected GDP growth in the decades ahead," the CPPIB spokeswoman says, declining to offer details.