Summary:
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The attitudes of U.S. public pension funds toward China are becoming more divided.
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The market value of Chinese stocks with U.S. listings fell by tens of billions this past week after reaching a record low.
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With the new allocation, China’s target weight will be slightly lower than Taiwan’s.
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“Additionally, the Texas fund abandoned its three-year-old intentions to establish an office in Singapore.
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Russia’s invasion of Ukraine at the end of February has made some people in charge of pensions warier of emerging markets.
The attitudes of U.S. public pension funds toward China are becoming more divided. Investment risks are rising, and politics between the world’s two largest economies are worsening.
Officials in charge of retirement plans are claiming a variety of positions. While Texas’ teachers’ retirement fund is halving its allocation to China stocks, California’s teacher pension system began searching for its first specialised China stock managers in late August. Florida’s public worker fund cancelled new investment plans in China earlier this year, citing previous attacks on tech and educational institutions.
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Pension administrators are concerned about various issues, not simply Chinese politics. A person who knows about the situation says that a large pension fund in the Midwest decided not to invest in Chinese private debt in 2019 and 2020. This is because the fund’s investment managers were worried that they might have to sell at a loss if state or federal lawmakers put new restrictions on Chinese investment.
Investment managers and people in pension plans say this difference has been growing for years. One reason is rising political tension between the US and China, which can be seen in the sudden cancellation of Ant Group’s first public offering two years ago and the ban on tutoring for money last year. Fund managers say that the rise in inflation in 2022, the possibility of a military clash between China and Taiwan, and the drop in Chinese shares worldwide after President Xi Jinping’s rise to power have all made these worries worse.
The treasurer of North Carolina, who is in charge of the state’s $110 billion pension system, said, “Anytime you see the types of drawdowns that we’ve been seeing in China, you have to be concerned.” On Wednesday, the market value of the fund’s holdings in China fell to $1.27 billion from $1.51 billion on September 30.
Over the past 20 years, state and local officials that oversee the $5 trillion in retirement savings for teachers, firefighters, and other public employees have increasingly looked to China to fill funding gaps. Significant state public pension funds put much money into Chinese real estate, venture capital, and private equity. Chinese stocks are a growing portion of the international or emerging-markets equity portfolios at various state and city pension funds around the nation.
Boston College Center for Retirement Research data on funds that give that level of information shows that, on average, 7% of public pension funds are invested in emerging-markets equities, up from 3% in 2001. Most pension managers try to match or beat the performance of global indices, of which China makes up at least 10%. They typically invest in stocks across all the represented nations since they don’t want to miss out on significant gains in one country and fall short of the benchmark.
Dan Bienvenue, the temporary investment chief at the time, said that the people who work for the $430 billion California Public Employees’ Retirement System spend “quite a bit of time” trying to figure out how Chinese markets work. As of June 30, 2021, the fund had $11 billion invested in China across all asset classes. Along with tangible assets, which are comprised of land and buildings, this includes public and private equity.
Calpers disclosed assets in the for-profit education industry target businesses of New Oriental Education & Technology Group Inc., TAL Education Group, and Gaotu Techedu Inc. last year. Before the government crackdown, the second-largest fund, the $290 billion California State Teachers’ Retirement System, had limited exposure to Ant Group through its private equity interests.
Like many public pensions, both funds have said they own shares in Alibaba, Baidu, JD.com, Pinduoduo, and NetEase. The market value of Chinese stocks with U.S. listings fell by tens of billions this past week after reaching a record low. Since October 21, the Nasdaq Golden Dragon China Index, which keeps track of numerous Chinese businesses listed on American exchanges, has fallen more than 10%. The Hang Seng Index, the primary benchmark in Hong Kong, fell 8.3% for the week.
According to pension advisors, actions like the California Teachers Fund’s attempt to hire Chinese stock managers are less typical. When returns in Europe and the United States are slowing, a source familiar with the fund, known as Calstrs, said the action is a part of a larger strategy of regional diversification.
In the meantime, the $183 billion Teacher Retirement System of Texas board of directors decided this month to reduce its target China equity allocation from 3% to approximately 1.5% of the fund. Pension officials cited improved diversification as a goal in the emerging-markets portfolio, where China stocks had risen to slightly more than one-third of total holdings.
With the new allocation, China’s target weight will be slightly lower than Taiwan’s. The change will take six months to take effect. In a memo from last month, the fund said it had the power to cut back on its investments in China “based on its own economic and political analyses.”
Additionally, the Texas fund abandoned its three-year-old intentions to establish an office in Singapore. Jase Auby, in charge of investments for the fund, says that the fund could manage local assets well from Austin.
Russia’s invasion of Ukraine at the end of February has made some people in charge of pensions warier of emerging markets. When pension funds from all over the world tried to take money out of Russia, they found that their assets were blocked or that no one wanted to buy them.
A transcript of what Lamar Taylor, the interim chief investment officer of the State Board of Administration, said at a meeting of trustees in March shows that Florida’s $182 billion pension fund stopped making new investments in China and other emerging economies.
Mr. Taylor gave many reasons, including the pressure on the Chinese real estate market and “the government’s sometimes unpredictable responses” in the for-profit IT and education sectors. In a letter to the board’s investment advisory council in August, he warned that Florida’s China assets could lose value if China doesn’t condemn Russia’s invasion and the two countries keep working together.
Mr. Folwell of North Carolina said that his fund has no plans to reduce the number of assets invested in China, even though many risks are now associated with all kinds of investments. The world’s second-largest economy in the world.
Analysis by: Advocacy Unified Network
