CPP Investments stands firm on its $52 billion China bet

"The bottom line is the risks are real," says legal expert

CPP Investments stands firm on its $52 billion China bet

In 2011, the Canada Pension Plan (CPP) fund made an investment in Alibaba Group Holding Ltd., an e-commerce giant based in Hangzhou, China. At the time, Alibaba was relatively unknown to most Canadian investors. However, it later became a global sensation, raising $25 billion in what was then the largest IPO in US history.

CPP Investments, the organization overseeing the CPP fund, continued to invest in Alibaba, making it a cornerstone of their strategy to capitalize on China's anticipated rapid economic growth. Mark Wiseman emphasized the importance of understanding China's economy and building local relationships to guide their investments.

However, as CPP's commitment to China grew, Alibaba faced a dramatic shift in fortune. Founder Jack Ma's disputes with Chinese regulators and his disappearance from public view in 2020 led to concerns about the company's future. Chinese authorities later imposed a $2.8 billion fine on Alibaba in 2021, and Ma relinquished control of Ant Group Co., another company in which CPP Investments had invested, following the cancellation of its $37 billion IPO.

Alibaba's stock price plummeted, losing nearly 80% of its value from its peak in 2020. This shift symbolized China's transformation from an investment hotspot to risky territory, exacerbated by tensions with the US and Canada.

Many institutional investors, including major Canadian pension funds like Ontario Teachers' Pension Plan, the Caisse de dépôt et placement du Québec, and British Columbia Investment Management Corp., decided to pause or exit their investments in China.

However, CPP Investments stands out for maintaining its commitment to China. Despite a slight reduction in assets tied to China due to regulatory changes and COVID-19 restrictions, CPP still holds over nine percent of its assets, amounting to nearly $52 billion.

CPP Investments' CEO, John Graham, emphasized their ongoing presence in China and the importance of understanding the world's largest economies.

“We’ve spent a lot of time on how to invest and ensuring that we are somewhat surgical, ensuring that we invest in assets or companies that we feel comfortable with,” Graham said. “I think it would actually be challenging to understand the global economy without understanding the largest economies within it.”

However, some experts have expressed concerns about the risks associated with their China investments, given the deteriorating political and economic landscape.

China's relationship with the US has soured, and Canada's ties have cooled following events like the arrest of Huawei executive Meng Wanzhou. China's actions, including bans on Apple iPhones for government officials and ambitious global infrastructure projects, have raised concerns in the West.

Additionally, China's economic growth has slowed, and it faces challenges like overbuilding in real estate, an aging population, rising youth unemployment, and the aftermath of the COVID-19 pandemic. This environment led to a sell-off of Chinese stocks by foreign fund investors and a drop in the renminbi's value.

“I think Canadian pensions face real risks regarding their investments if China were to expropriate them or take some regulatory measure that amounts to the same thing,” said Mark Warner, an international trade, competition and investment lawyer at MAAW Law.

“The bottom line is the risks are real and the legal recourse raises its own uncertainties and risks,” Warner added.

While CPP Investments remains committed to China, other investors, both in Canada and globally, have become more cautious, pausing new investments and reevaluating their existing ones.

Claude Lamoureux, former CEO of the Ontario Teachers’ Pension Plan, highlighted the benefit of the long-term investment horizon for pension managers like CPP Investments.

“If you are CPPIB, you look ahead 25 years, not 25 months,” he said, providing stability during market volatility.

“The question of how much [to invest in China] is constantly being debated,” Graham said. “The percentage is really grounded in what we think the forward-looking returns will be from a risk-adjusted basis, ensuring that we get compensated for the risk.”