Canadian pension funds are pausing private investments in China due to geopolitical risks and regulatory changes in the country.
Caisse de dépôt et placement du Québec (CDPQ), Canada’s second-largest pension fund, has stopped making private deals in China and closed its Shanghai office earlier this year.
Photo by Markus Winkler
The fund declined to comment on the reason behind its decision. Ontario Teachers’ Pension Plan (OTPP), Canada’s third-largest pension fund, has also reduced its investment activities in China and paused further private investments due to the changing post-COVID economic environment, recent regulatory changes in China, and the continued deterioration of US-China and Canada-China relations.
OTPP has reduced its stake in investments in Chinese companies more widely and shuttered its China equity investment team based in Hong Kong. OMERS, another Canadian pension fund, has allocated 2.5% of its portfolio to China, primarily through public markets and some fund exposure, but does not have any private direct investments in China.
The pension funds’ withdrawal from the illiquid private equity space in China is a signal of their growing concern with the market, including the deterioration of relations between Canada and China and regulatory risks for pension funds in Canada.
China has restricted work by advisory and consultancy firms, banned operators of critical infrastructure from buying products of Micron Technology, and faced Western sanctions on more than 9,000 Chinese firms, creating regulatory risks for pension funds in Canada and elsewhere.
Canadian pension funds have been accelerating their investment in China over the last decade. IMF data show that the total investment by Canadian investors in mainland China increased 485% to $39.3 billion in 2022 from $8.1 billion in 2013.
However, the recent geopolitical risks and regulatory changes in China have prompted Canadian pension funds to pause private investments in the country.
The pension funds are likely taking a wait-and-see approach, both in terms of the Canada-China relationship and China’s domestic policies.
Public equities are easier to offload if concerns are realized, and the funds may want a stake in case the environment improves. The pension funds have embedded ESG considerations into their investment due diligence processes and follow all applicable laws, including sanctions and trade restrictions.
