The perils of Canadian pensions and universities investing in China are clear, report says. Just look at Russia

The heavy toll on financial investments in Russia as a result of that country’s war on Ukraine should serve as a “wake-up” call for Bay Street and Wall Street when it comes to further investing in China, a new report says.

Asset managers, pension funds and university endowments have continued to have holdings in Chinese businesses with ties with Beijing, according to the report “Passively Supporting Oppression” by U.K.-based Hong Kong Watch, a watchdog of human rights, freedoms and rule of law in Hong Kong.

“It is worth considering parallels between the Chinese situation and the recent crisis in Ukraine and Russia,” says the 82-page report, being released publicly Wednesday, that examines the holdings of pension funds, college endowment funds and other groups in Canada and the U.S.

“Russia’s invasion of Ukraine should serve as a blueprint for the folly of financial service companies, ratings agencies, index providers, and bond holders taking a cavalier attitude to the financial risks that geopolitical crises can bring.”

While there has been a strong push to adopt “environmental, social and governance (ESG)” criteria for “responsible investing,” the report said, the same institutions that are driving the push are also doubling down on their commitment to China.

Alibaba, Tencent, iFlytek and Zhejiang Dahua Technology are among some of the “problematic” Chinese equities that Hong Kong Watch highlighted and called for greater scrutiny by investors.

The Canadian Pension Plan Investment Board has been found to have considerable holdings in Alibaba and Tencent, as well as a number of U.S.-sanctioned companies: Zhejiang Dahua Technology, iFlytek, China General Nuclear, China National Nuclear Corp., ZTE, China State Construction International, AviChina Industry and Technology, and Xinjiang Goldwind Science and Technology.

It’s similar at Canada’s Civil Service Superannuation Fund; provincial pension funds in Alberta, British Columbia, Ontario and Quebec; as well as endowment funds at the University of Toronto, the University of Alberta and Queen’s University.

While investments in Alibaba and Tencent are exposed to regulatory and political-legal risks as shown in their nosedive in market value last year as a result of Beijing’s crackdown on the Chinese tech giants, the report said there are also risks of violating ESG investment principles, particularly in the sphere of human rights.

“Investments in Tencent and Alibaba may be problematic, as Chinese technology companies of their size cannot divorce themselves from the Chinese state, which is increasingly using a mixture of surveillance and technology to oppress and target minorities within its borders,” said the report.

WeChat, owned by Tencent, has also been accused by Human Rights Watch of censoring its users and putting them under surveillance on behalf of the Chinese state, the report added.

“The fact that major pension funds continue to place serious investment in companies that the U.S. government has placed on Entities Lists because of their complicity in human rights violations is unacceptable,” Hong Kong Watch co-founder and research fellow Johnny Patterson, who co-authored the report, said in an email.

“It is particularly jarring that foreign investment in Chinese Government bonds increased by $1 trillion RMB in the same year that China imposed the National Security Law in Hong Kong.”

The law that came into effect in July 2020 bans activities that Beijing deems to endanger its national security and has been criticized by many western countries, including Canada, as undemocratic and an attempt to suppress dissent.

Responsible investing has traditionally focused on the impacts on the environment, but the Russian war in Ukraine has brought new light to the social dimension of the risks for firms having too much exposure to authoritarian states with poor human rights records.

The report noted that Western investors were ill-equipped to deal with the financial fallout of the Russian invasion and the international sanctions that followed, despite early warnings by the White House over the massing of troops and military equipment at the Ukrainian border.

“A week before Russian tanks rolled into Ukraine and paratroopers descended from the sky, Western investors appeared bullish on the likely impact the war and Western sanctions would have on Russian equities,” said the report.

“They believed that rising oil and gas prices paired with the false optics that a Russian invasion had been averted offered a positive omen for investors looking to pick up Russian equities.”

Fitch Ratings Agency and Moody’s Ratings Agency soon downgraded Russia’s rating from Triple B to junk status. BlackRock, the world’s largest asset manager, in March declared $17 billion (U.S.) worth of losses in its Russian equities, said the report, citing the Financial Times.

“ ‘Social’ factors are only irrelevant to the bottom line in times of stability. When geopolitical priorities, co-ordinated sanctions, and investor pressure combine — the risks for businesses increase,” concluded the report.

“If there is one lesson that can be learned from the Russian situation it is that we must reduce our dependency on totalitarian states. It seems probable that the attitudes of the public and governments will move in their attitudes to China in the coming years.”

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