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Why are Canadian pension funds eyeing investments in China?

Why are Canadian pension funds eyeing investments in China?

China could be key to ensuring the sustainability of the Canadian Pension Plan and other safety nets in the years to come.

Just the Basics

  • Canadian pension funds are looking to increase their investments in China to help ensure the long-term viability of various social programs

  • From casinos to computers, Canadian pension funds are scooping up deals across China while remaining unconcerned about the current frosty state of bilateral relations

  • Concerns about Beijing’s human rights record has some worried that Canadian money is helping fund Chinese companies involved in surveillance and censorship efforts

Hong Kong: You find yourself walking the city’s bustling streets, the Asian metropolis a warren of concrete alleys and towering shards of glass and steel. Perhaps you are a Canadian tourist, or visiting family, or just in the city for business but something catches your eye no matter your reason for being there: the office of an investment fund. In and of itself such a sight is common enough, Hong Kong is after all a global financial hub; however, what catches your attention is the building’s tenant rather than the structure itself. Alongside the logos of internationally renowned financial institutions you see (more accurately, read) something strange: Canada Pension Plan Investment Board (CPPIB). 

If you were in Shanghai at that moment you would have also encountered a strange sight - a sliver of Canadiana in China’s largest city - an office building housing the Caisse de dépôt et placement du Québec (CDPQ). You may wonder just what these rather mundane organizations are doing in the world of high finance on the other side of the world, yet these investment boards are key players in Canadian investment in China. Alongside the Ontario Teachers Pension Plan (OTPP), the CPPIB and CDPQ constitute Canada’s three largest pension funds, all of which are increasing their Chinese portfolios.

The investment arms of Canada’s various pension plans were established in order to invest social program payments in long-term ventures designed to outperform the market in the long run. Simply dumping pension payments in a bank account does not utilize these funds effectively, whereas measured, diversified investing does a better job of growing the pot than simple compound interest could ever achieve. Clever investing by the CPPIB (established in the late 1990s to close the gap between Canada’s pension payments and future commitments) has enabled the CPP to become financially solvent for at least the next seventy-five years. 

Canada’s pension funds head east

The success of the CPPIB and other Canadian pension funds has been praised both internationally and domestically; a key part of this success is the adoption of a long-term outlook. Jennifer Thompson, writing in the Financial Times notes that “the Canadian retirement system is regarded as one of the best in the world because of a high rate of contributions from both employees and companies, the independent governance of the funds themselves and their willingness to experiment.” For instance, the CPPIB became the first fund in the world to issue a green bond in order to bolster its efforts to invest in renewables. With C$392 billion under management as of March 2019, the CPPIB ranks among the ten largest sovereign wealth funds in the world, thanks in part to its willingness to invest in developing economies, especially China. 

Consequently, despite ongoing tensions between Beijing and Ottawa, Canadian pension plans are continuing to invest in China, banking on the long-term benefits outweighing any present unpleasantness. Speaking on China, former CPPIB CEO, Mark Wiseman explains that “I think long run, and one thing to remember about China: they play a long-term game. I think they understand the benefit of the Canada-China relationship, and I think Canada equally understands the benefit of the Canada-China relationship. And this [current turmoil] too will pass.” Similarly, OTPP CEO Ron Mock maintains that “China’s a long game from our perspective and while there’s always skirmishes of one kind or another, in the short term, we believe that it’s absolutely necessary to be there.”

Funds like the CPPIB have been investing in China for over a decade, slowing increasing their exposure to the world’s second largest economy. For instance, the CPPIB’s first international office was opened in Hong Kong in 2008, with the OTPP following suit with an office of their own in 2013. The CDPQ has an office in Shanghai and the CPPIB is currently considering opening an office in Beijing as early as 2020. “As we’re also growing our portfolio in China which is around ten percent of our total fund it makes sense for us to consider our footprint there,” remarks CPPIB Asia-Pacific head, Suyi Kim: the CPPIB plans to double its investment in China to around twenty percent of its total fund by 2025. Overall, the CPPIB fund is expected to reach C$800 billion worldwide by 2030, with emerging markets accounting for thirty percent up from the current fifteen.

While the primary investment destination for Canadian pension funds remains the United States, the rise of Asia’s economies and the changing global economic balance invariably has Canadian organizations looking to diversify. As of March 2019, the CPPIB had C$103.7 billion or 26.5 percent of its total fund invested in the Asia Pacific region. Chief among these markets is China, where the CPPIB has invested C$28 billion in mainland China and C$42 billion in Hong Kong over the past decade. Indeed, Canadian pension funds have been leading Canadian investment in the Asia-Pacific region, with their share of total Canadian investment in the region growing from just one percent between 2003-07 to twenty-five percent between 2013-17. Whereas much of this increase has been directed at China it is interesting to note that annual Canadian investment in China hit its peak in 2008 and has declined since. This is likely due to fewer low hanging fruit in the Chinese economy, the years-long cold shower that was the global financial crisis as well as the end of double digit GDP growth as the Chinese economy matures.


By tailoring investments to local markets and by diversifying said investments, pension funds like the CPPIB can minimize the risk from any one market or sector, allowing for long-term planning. Touching on this issue, CPPIB CEO Mark Machin explains that “we are more likely to be investing in assisted living and old age care in China than India, while in India [we’re] looking at things like education.” China’s ageing society and India’s growing youth cohort both represent opportunities for long-term investments. Even the ongoing trade war between the United States and China offers Canadian funds certain opportunities. While trade tensions between Washington and Beijing have reduced the number of investment opportunities due to muted growth and private sector ambitions, the dip in public markets in late 2018 allowed the CPPIB to make significant investments in some large publicly traded Chinese technology companies.

Lower valuations in Chinese equity markets provided an opportunity for the CPPIB and others to snap up deals and get more bang for their buck, with the CPPIB increasing investment in China by C$7.5 billion by the end of the 2019 fiscal year. This included growing the CPPIB’s share in its three largest Chinese positions, namely Alibaba Group (the CPPIB is the 35th largest investor in the Chinese company), Tencent Holdings and AIA Group, by C$1.9 billion. The CPPIB was also part of a C$600 million investment in Ant Financial, China’s leading financial services technology platform. Further investments include a C$800 million plus investment in residential property developments in Hong Kong and Chengdu via Longfor Group, a C$4 billion logistics joint venture, and a stake in Shanghai’s Raffles City shopping and office complex.

The CPPIB is not alone in making substantial investments in China in recent years, with the OTPP (which manages C$194 billion) making a C$218 million investment in Macau casino and hotel developer Louis XIII. The OTPP also has a stake in Hong Kong’s Chow Pai Fook, the world’s largest jewellery firm, and acquired Baosteel Gases, a leading Chinese industrial gas company, in 2018. Overall, the pension organization plans to double its Chinese portfolio in the coming years from C$11 billion to C$20 billion. As for the CDPQ, one key deal was the pension fund’s forty-four million share, C$175 million investment in online retailer back in 2012. Just two years later,’s IPO saw that investment rise in value to C$630 million. is now the world’s third largest internet company by revenue and the global leader in drone-based delivery. At current share prices, the CDPQ’s investment is now worth C$1.7 billion.

Canada-China foreign investment (millions of dollars CAD)

For some the question will remain why Canadian pension payments are being used to fund overseas investments - surely Canadian pension funds ought to be investing in Canada. Firstly, Canada is a small, mature market that does not have enough investment opportunities to generate the kind of money required to fund various pension programs for decades to come. Even if the Canadian market was large enough, investing everything or even the majority in Canada imbues these investments with significant risk. If Canada faces a severe depression or other disaster, overreliance on the Canadian market would decimate these investments and any benefits they might have accrued.

Diversity is crucial for long-term viability. The CPPIB was created in 1999 and was allocated C$36.5 billion to invest. At the onset, one hundred percent of the CPPIB’s assets were in Canada, this ratio decreased to roughly two-thirds in Canada and one-third invested overseas by 2006, and currently stands at fifteen percent and eighty-five percent respectively. In the meantime, the CPPIB’s assets have increased more than tenfold, so the decrease in the share of investments in Canada is a relative one, rather than an absolute one. The CPPIB’s current assets in Canada amount to C$58.8 billion compared to C$36.5 billion in 1999. Even adjusted for inflation this is still an increase from C$53.8 in 1999 (in 2019 dollars) to C$58.8 billion - roughly a ten percent return on investment over twenty years. Some C$340 billion in additional assets were accrued during this time by investing in other markets, such as the United States (33.5 percent of CPPIB total investment) and places like China.

Diversification remains key, yet the CPPIB, OTPP and CDPQ all maintain investments in Canada at disproportionate rates to the size of the Canadian economy, as is to be expected given the funds’ origins and ultimate benefactors. Specifically, 15.5 percent of the CPPIB fund is in Canada, compared to thirty-six percent of the CDPQ and forty-four percent of the OTPP. For all three funds, the largest foreign investment destination is the United States at thirty-three, thirty and twenty-three percent respectively. The main difference lies in the degree to which each fund is invested in Asia, with the CPPIB leading the way with twenty-three percent of its investments in Asia, compared to fourteen percent for the CDPQ’s emerging market portfolio (China, India, Brazil, Mexico, Colombia) and ten percent for the OTPP.

Investing in China not a question of if, but how

The scope and scale of pension fund investment in China may initially alarm some, yet when viewed in conjunction with average estimated return on investment as well as market size, it makes sense for Canadian pension funds to have a substantial presence in China, if for no other reason than the fact that ignoring or underperforming in the world’s second largest economy makes little sense. Even the staunchest China-hawks will admit the need for corporations to have a presence in China should they wish to maximize their potential profits and client base. 

A trickier question is how (rather than whether) Canadian pension plans should be investing in China. The totalitarian nature of China’s regime and the government’s deep ties with Chinese businesses in turn poses questions about ethical investing. Canadian pension funds run the risk of domestic backlash should they be found to be investing in dubious enterprises, especially those involved in the suppression of human rights in China. While due diligence is a key feature of any reputable investment fund, the dual use nature of many Chinese electronic, computing and telecommunication products can blur the lines, making compliance more difficult.

The CPPIB and other pension funds have already faced criticism for their investments in Chinese companies allegedly tied to human rights abuses in China, especially in Tibet and Xinjiang. In 2011, the OTPP came under criticism for taking part in a $1.3 billion investor group that acquired U.S based Blue Coat System whose products could be used for surveillance and censorship. The Munk School of Global Affairs’ Citizen Lab found evidence of Blue Coat products being used in Syria in 2011, and a 2013 report by the University of Toronto group found evidence of Blue Coat’s PacketShaper app (capable of deep packet inspection and mass surveillance) being used on websites in a host of countries, including China.

CPPIB Global Diversification in billions of dollars (CAD)

As of March 31st, 2019 | Source: CPPIB 2019 Annual Report

CPPIB Real Assets (percent)

As of March 31st, 2019 | Source: CPPIB 2019 Annual Report

CPPIB Currency Diversification (percent)

As of March 31st, 2019 | Source: CPPIB 2019 Annual Report

More recently, the CPPIB came under fire for its investments in two Chinese companies allegedly cooperating with government repression efforts in the Muslim-majority Xinjiang region of China. Specifically, CPPIB interests in Hangzhou Hikivision Digital Technology Co. Ltd. and Zhejiang Dahua Technology Co. Ltd. have come under scrutiny as the surveillance equipment produced by both companies is employed in population control efforts in Xinjiang. In May 2019, Calgary-Shepard MP Tom Kmiec raised this issue publicly, after being approached by constituents with family in western China. Calling on the CPPIB to act, Kmiec asked whether the fund will “commit to divesting CPPIB funds [from the aforementioned companies] - the funds that Canadians are paying? [...] Every single Canadian is basically paying into these companies and equity stakes to facilitate the oppression and repression of Muslim Uyghurs in Western China for nothing more than their ethnicity and their religion.”

Kmiec was not satisfied with CPPIB statements that those two investments had been red flagged, calling the CPPIB executive Marc Leduc’s response “very cold.” The concerns of Kmiec and others highlight the ongoing balancing act any Canadian investor must pull off if they wish to avoid domestic backlash as a result of their Chinese investments. And where ought the CPPIB and others draw the line? The CPPIB is a major investor in Alibaba and its subsidiary Ant Financial as well as Tencent, all of which facilitate a vast host of businesses, but are also involved in China’s controversial Social Credit Program which monitors an individual's actions across as many platforms as possible, rewarding or punishing them based on whether their various personal habits and opinions align with Beijing’s list of approved behaviour.

The Bottom Line

The shrewd investing of the CPPIB, OTPP and CDPQ over the past two decades has enabled them to join the ranks of the world’s largest sovereign wealth funds. Originally conceived to ensure the long-term viability of various Canadian social programs, the funds’ long-term investing outlook has positioned them as some of Canada’s largest overseas investors. With diversification priority number one, Canada’s pension funds have sought to increase their presence in various emerging markets - especially China - to offset their traditional reliance on the United States.

Far-sighted investing in China has already paid dividends, and all three organizations now have offices either in Hong Kong or mainland China. Canadian pension funds have quickly become a leading driver of Canadian investment in China and Asia in general at a time when overall annual Canadian investment in China has declined since its 2008 peak. China’s economies of scale mean that any serious long-term investment portfolio cannot ignore the Middle Kingdom, as China is set to become the world’s largest economy in the coming years.

Some may feel uneasy or angry about Canadian pension money being invested in China, especially given the current rocky state of bilateral relations, but investors are looking beyond short-term turbulence to the potential returns that the Chinese economy promises. The primary question right now is not whether we should be investing in China, but rather how and to what degree, especially given the human rights concerns which inevitable trail in Beijing’s wake. The dual use nature of many IT investments makes drawing this line even harder, as prominent Chinese companies invariably have connections to state organs in one form or another, and are often required to aid Beijing’s plans. Divesting from weapons or surveillance companies is easier than untangling investments in China’s IT multinationals. The core companies underpinning the Chinese e-commerce market are often the same ones aiding government efforts at surveillance and censorship. The likes of Alibaba, Tencent and Weibo may be complicit, but just try doing business in China’s digital economy without them.


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