CPP Investments stands firm on its $52 billion China bet

 

CPP Investments 

stands firm on its 

$52 billion 

China bet

....appointed by Chrystia Freeland

CPPIB is a partner of the World Economic Forum.

Beijing, China (October 31, 2019) – Canada Pension Plan Investment Board (CPPIB) appoints Yin Ke to the newly created role of Senior Advisor, China, supporting deal origination and investment opportunities across asset classes.

Based out of Hong Kong, Ke will focus on identifying and evaluating potential investment opportunities and partners that fit CPPIB’s overall strategy in China.

In his role, Ke will work with our investment teams based in Hong Kong, London and Toronto to support deal origination and contribute to the assessment of investment opportunities in China across all sectors and asset classes.

Ke begins in his role effective immediately, and will coordinate his efforts closely with Suyi Kim, Senior Managing Director and Head of Asia Pacific.

“Having a senior, experienced resource like Ke who has deep expertise and networks in China is a major milestone,” said Suyi Kim. “His appointment to our team will help focus our efforts and identify new opportunities across asset classes in China, which is key to our plans to invest more in emerging markets.”

Ke has more than 30 years’ experience in capital markets, corporate finance and investment banking in both the People’s Republic of China and beyond. He was most recently Vice-Chairman at CITIC Pacific, and prior to that he was Vice-Chairman, Executive Director and a member of the Executive Committee of CITIC Securities. He has held various other roles within the CITIC Group, including Chairman and CEO of CITIC Securities International, non-executive director of CLSA Limited, non-executive director of CITIC Pacific, non-executive director of DCH Holdings Limited, and non-executive director of CITIC Capital.

“I’m looking forward to working with the CPPIB team to identify and deliver opportunities to invest in leading companies and projects in China, a market in which CPPIB is already a significant investor,” said Yin Ke.

...........................................................................................................................................

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.

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.
How could they have known that?

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.

Read more: British Columbia Investment Management Corporation pulls out of 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.”

Board of Directors

CPP Investments is internationally recognized as a leading example of sound pension plan management. We are independent of the Canada Pension Plan (CPP), operate at arm’s length from federal and provincial governments and are guided by an independent, highly qualified, professional Board of Directors.

China building chilling '15-minute smart city' with facial recognition cameras on lampposts

Located around 60 miles south of China's capital Beijing is a brand new high-tech smart city called Xiongan where it's hoped around four million people will live in the future

Xiongan is located around 60 miles south of China's capital Beijing NFL

• 
  

China is building a brand new high-tech smart city which features driverless buses, facial recognition cameras on every lamppost and digital roads.

Hundreds of thousands of people have already moved into the “15-minute city” Xiongan, located about 60 miles south of China's capital Beijing. It's expected four million people will eventually move into the area, which has partly been build because of congestion and pollution concerns in Beijing,

The driverless buses, which are currently undergoing trials, are said to improve the efficiency of the transportation network. The vehicles can not only recognize traffic lights and road signs but also reduce speed or stop in case of obstacles.

READ MORE: China to reinstate 'panda diplomacy' with US as Xi Jinping hints pair will soon arrive

The smart electric buses have a detection range of almost 250 metres and can drive for up to 200km before needing to be charged. Another feature of the city is the facial recognition lampposts.

According to ChinaDaily, the city is home to more than 200 km of digital roads, with sensors on over 7,000 lampposts monitoring traffic to help reduce congestion and support autonomous driving. Every lamppost will also be equipped with facial recognition cameras, reports Ben Swann, with every entrance and exit reportedly having checkpoints placed on them.

Millions of homes are being build in the smart city 

Duanfang Lu, an urban design professor, told Al Jazeera: "Xiongan is gathering a lot of best talents from different disciplines from different parts of the country to design this new solution for the whole country." She added: "A lot of people in major cities decided not to have children because it is too hard for their future children to get into good schools. So Xiongan is trying to overcome problems like this so it has been a very child-focused urban design."

Xiongan has been described as a "15-minute city", which essentially means that it has been designed so everything is accessible within a 15-minute walk, no matter where a person lives in the city. UK architect Chapman Taylor, who devised a masterplan for the 27,200-hectare site, explain on their website: "We did some research based on Chinese people’s demands. 

"Theoretically, daily needs are accessible within your 5-minute living circle. Your weekly needs would be 10 minutes away and the 15-minute facilities are the things you need occasionally, say, monthly or seasonally. It’s a very logical way to design a city. We’ve also evaluated green transportation options, such as building up public transport + bike + walking modes and we estimate that the proportion of green transport trips will reach 90 per cent."

It's thought around four million people will eventually move to Xiongan 

According to the website, the urban project "aims to create a high-quality, efficient and smart city environment which encourages equality and sustainability". It's digital and smart way of living could be implemented in other cities if Xiongan proves to be a success.

"In Xiong’An, we will strive to reduce the impact of uncertainty. We recommend that the city is run on Smart City principles; it’s part of our thinking and would help the strategic management of the city," Chapman Taylor say.

"It’s quite hard to apply in macro terms, but on a more micro level it’s related to smart mobility, healthcare, security, energy, waste and water. Such as, the transportation system would be fully ‘smart’ and able to react to blocks in traffic, reset signals and redirect the flow of traffic accordingly, without the need for human intervention.

Much of the city is a construction site at present as homes are built 

"Taking it even further, for example in healthcare terms, you could look at prescriptions being automatically tailored to people’s requirements, such as dosage being automatically administered in the correct proportions based on someone’s height and weight."

While some have praised the idea of building a smart city, others have concerns around privacy and how information is collected. "Smart cities are, above all, surveillance cities that enable close monitoring and management of large populations," Vincent Mosco, a smart city expert told USNews.

"As a leader in smart city systems, China is subjecting its citizens to greater routine surveillance than citizens have experienced at any time in history. Sensors are now embedded throughout the urban infrastructure, in everyday home appliances, and in the devices citizens carry. These collect data 24/7 with or without the awareness and approval of citizens."

 

Europe is cracking down on poorly made, cheap Chinese electric cars

The boom has finally been lowered on Chinese electric-vehicle companies. On September 13, European Commission president Ursula von der Leyen used her State of the Union speech to announce that the organization is launching an “anti-subsidy investigation into electric vehicles coming from China.” 

The move—which could have serious ramifications for global automakers—has long been in the making. 

In recent years, China has become a major exporter of cars, mostly thanks to the country’s dominance in producing EVs. MG, once a British sports car brand that has been owned and operated by a Chinese company since 2005, had the second-highest market-share increase in Europe in the first half of 2023, while other Chinese companies, like BYD and Nio, have also been making major gains in the European market. This growth has raised alarms for the domestic automobile industry on the continent, which is responsible for over 6% of total employment in the European Union. 

“In my opinion, this announcement is just the first of several measures that Europe will consider taking in order to protect its local industry,” says Felipe Muñoz, a senior analyst at the London-based auto-industry consultancy JATO Dynamics.

Beyond competition, the investigation is also about politics, says Ilaria Mazzocco, a senior fellow at the Center for Strategic and International Studies and the coauthor of a recent report on China’s EV exports. “I think it’s coming as a response to concerns that Europe is too dependent on China,” she says, “and that the benefits of decarbonization are maybe flowing to China rather than staying in the European Union.” 

No matter how it shakes out, an official inquiry could hurt the expansion of the Chinese EV business at a critical moment. This is the first time in history that Chinese auto brands have a decent chance at beating foreign brands on their home turf, as MIT Technology Review reported back in February. But the investigation, and potentially others to come from more countries looking to compete in the field of EVs, could very well halt their expansion before it really begins in earnest. Even in just the first 24 hours after von der Leyen’s speech, SAIC and BYD—the two Chinese auto companies that have performed the best in Europe—saw their stock prices drop by more than 3%. 

A changing competitive landscape

The driving concern behind the investigation is the impact of Chinese EVs on Europe’s economy, particularly its world-leading auto industry.

Traditionally, Europe has exported many more cars to China than it has imported, but that trade surplus turned negative for the first time in December 2022. As China managed to get the upper hand in EV and battery technologies, both Chinese brands and Western ones, like Tesla, have ramped up their EV production capacity within China, and some of the products are then being shipped for sale in Europe. 

Europe is currently an ideal export market for Chinese EVs, says Zhang Xiang, a Chinese auto-industry analyst and visiting professor at Huanghe Science and Technology College. Europeans tend to be more well-off than people in other markets and receive higher subsidies from the government to purchase EVs, he notes, and the subsidies make up for the heavy shipping costs to get the cars across the ocean. That’s why nearly half the cars exported from China are sold in the European market, Zhang says.

Given China’s pretty large head start in the EV auto trade, it seems unlikely that European automakers can quickly catch up on the technological front, so China’s advantage will likely only grow. 

In the long term, it could get to a point where BYD will be able to sell its cars profitably in Europe while still keeping the price lower than the cost of production for European auto companies, says John Lee, a Berlin-based researcher and director of the consultancy East West Futures. And that would spell doom for them, he adds: “If you can’t sell at a price [that’s] competitive with your rivals without actually losing money on production, then that’s a death spiral.”

The threat from Chinese competitors feels so urgent that observers say this could be a life-or-death moment for well-known European brands like Volkswagen, the world’s largest automaker.

“[The fall of Volkswagen] is an extreme scenario, but it’s not implausible, and then you have the cascading effects,” says Lee. “The auto sector in Europe is quite transnational. Parts are made in Eastern and Central Europe, with Germany as a hub. That means there’s a potential flow of effects to Poland, to Hungary, and other places that make components.”

Allegations of unfair competition

So far, the only official details known about the investigation are what von der Leyen said in her speech: “Global markets are now flooded with cheaper Chinese electric cars. And their price is kept artificially low by huge state subsidies.”

The burden will be on China to demonstrate that the price of Chinese EVs is not subsidized. That will be a hard lift, since it’s well known that continued state support has been a big factor in the success of China’s EV industry. 

While the most explicit Chinese government subsidy—a one-time purchase credit for consumers—ended in 2022, there are many other implicit subsidies still in place in the country, says Mazzocco. Examples include below-market credit, below-market equity, negotiated rates on land leases, and ad hoc tax cuts given by local governments. 

“A year ago, we tried to quantify industrial policy spending in several countries, and we found that below-market credit was the most significant instrument used in China, and it was massive relative to every other country,” she says. “So I think if they want to find subsidies, they will find subsidies.”

If the investigation does find that Chinese companies indeed have an unfair advantage, European officials could institute a higher import duty on Chinese EVs. A full investigation may last about a year, says Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, an investment management firm, who has advised the European Commission in the past.

The closest historic parallel is the 2012 EU investigation into Chinese state subsidies in the solar panel industry. It almost led to a 47% tariff on solar panels imported from China, but the trade dispute was settled at the last minute. 

China might not be that fortunate this time, Garcia-Herrero says. Then, the Chinese government leveraged its impact on European companies and let them convince the politicians to pull back, she says. But European auto companies, more worried about their survival, are less likely to temper this investigation.

The dilemma for European car brands

European automakers would, broadly speaking, benefit from weaker Chinese competition, but targeting Chinese companies could also backfire in some ways; many European brands have significant investment in China or collaborate with Chinese brands. 

Half the EVs exported by China are actually made by foreign companies or joint ventures, according to a data analysis by Mazzocco. In the first six months of 2023, 39.2% of China’s EV exports were Teslas, while joint ventures between European and Chinese companies accounted for 9.5% of them. 

“Western companies that are producing in China represent a very significant portion of those exports. And at the same time, these are also the companies that these tariffs are supposed to protect. So it creates this very weird dilemma,” says Mazzocco.

Within Europe, brands also have different incentives because of varied relations with the Chinese market. German brands, including Volkswagen, have been increasing their investment in the country, including investments in making EVs; meanwhile Stellantis, which owns brands like Jeep, Chrysler, and Peugeot, is pulling out of the Chinese market. 

The different levels of exposure are important because if the European Commission ultimately institutes tariffs, it’s almost certain that China will retaliate with some kind of countermeasures—which would in turn hurt European brands that have a deeper relationship with the Chinese market.

The political turning point

For a long time, Europe has been more friendly to Chinese companies than the US. This is part of the reason Chinese EV brands have chosen the continent as their first stop for expanding into Western markets. 

“You can see it by the number of Chinese brands available in the US: zero. While in Europe, you already have more than 15 [Chinese brands],” says Muñoz, the London-based analyst. But that friendliness developed when Europeans didn’t see a threat from Chinese auto brands. “I would like to see how much of that friendship will continue when the Chinese brands continue to grab more market share,” he says. 

The political environment in Europe has also become more hawkish against China, which “is forcing the politicians’ hands to adopt measures like this,” says Lee. 

“There’s been a lot of souring on China across the board over the last few years,” he says, “and that’s relevant political context for taking more ambitious, forward-leaning measures regarding a particular industry, like EVs, that target China.”

Nevertheless, Europe hasn’t shut its doors to China to the same extent the US has, at least not yet—meaning the anti-subsidy investigation could lead Chinese companies down two very different paths. 

If geopolitical tensions between Europe and China continue to grow, Chinese EV brands may simply be pushed away from investing in Europe, just as they have refrained from entering the US market for now.  

“If the door to Europe is shut, Chinese EV brands will have to choose the smaller markets, like Southeast Asia, South America, and the Middle East,” Zhang says. “It will be a severe blow to the globalization process from China.” 

On the other hand, investigations like this one can actually be seen as an invitation for Chinese companies to set up shop in European countries. Some Chinese EV companies are already in the exploratory stage of building factories in Europe. Following through on those plans would not only show their contribution to local employment and taxation but allow them to avoid future tariffs. “There were announcements [about building Chinese factories], but we still need to see it happen,” says Muñoz.

Either way, the investigation could have a ripple effect, warns Garcia-Herrero. Other countries, like Brazil, have their own ambitions for a domestic EV industry—and they may take inspiration from European regulators in going after China. “At least for countries that can produce their own vehicles, they may start doing the same,” she says.