Canada-China Relations Committee on April 24th, 2023

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

Can you tell us if there has been any discussion around this in Canada ?

We are often seen, as a country, as leaders on human rights around the world. Parliament here recognized a genocide taking place against the Uyghur Muslim minority in Xinjiang. The Government of Canada itself has spoken up in respect of human rights abuses that have been taking place in authoritarian states like the PRC.

However, then we get reports from time to time that public pension funds, such as the CPPIB, the Caisse de dépôt et placement du Québec, provincial pension funds, quasi-governmental pension funds like the Ontario Teachers' Pension Plan, and other pension funds tied to public employment, are also investing indirectly through index funds in these PRC-based companies committing human rights violations.

Is there any discussion taking place that's saying this should not be happening and we should be putting an end to it? It doesn't seem to me that there's a lot of discussion about it.

[Dr. Alex Payette]

No, there's no substantial discussion on this, and we believe that even if this were to happen, maybe not much would come out of it, because—to complete the previous point—most of the firms you're talking about are usually not listed. Generally speaking, they won't be indexed; some of them are too small. Even the Chinese index funds wouldn't pick them up because they're too obscure. Some of them are usually considered “too red” to be put in index funds, if you understand what I mean.

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

Yes, I understand, but then we're talking about direct private equity investment, in which case the public pension funds here in Canada obviously are directly accountable. They can't explain it away by saying that these are indirect investments and that they bought a certain number of MSCI index funds but don't participate in the due diligence in the decisions as to what makes up the index or hedge funds. If they're placing private equity directly, they're directly responsible for that purchase of private equity.

It seems to me to be jarring. All I've heard from Bay Street and Wall Street over the last several years is ESG. Then I read these reports that Canadian and American investors have been snapping up private equity or publicly traded securities in firms that are associated with gross human rights violations. To me, it seems like a very discordant discussion we're having on investment in North America as it relates to human rights and environmental, social and governance issues.

[The Chair, Liberal, Ken Hardie]

Thank you, Mr. Chong. I'm sure there will be a recommendation coming out of that in due course.

We'll now turn to Mr. McKay for five minutes or less.

[John McKay, Liberal, Scarborough—Guildwood, ON]

To carry on the discordant conversation, Mr. Chair, you and a few of us on this committee just returned from Taiwan. May I first of all say that the work of this committee is very worthwhile. We witnessed and were privileged to present your report to the President of Taiwan. She was quite touched by the work of this committee.

I know sometimes you labour in obscurity on a Monday evening between 6:30 and 9:30 in the basement of an old, musty building, but it was appreciated half a world away.

One of the interesting comments she made was that Taiwan is drawing its investments down from mainland China. She had facts and figures to back it up. It's significant. Of course, Taiwan's relationship with China is far closer and far more significant than ours is, but it struck me that Taiwan had the guts to start to pull itself out of China, whereas Canada continues to dance around the maple wondering whether it should or it shouldn't, and wraps itself up in ESG concerns.

The first question I have of you is this: Given the geopolitical concerns, would either one of you put an investment into China or recommend to one of your investment entities that they put a fresh investment into China, given the geopolitical tensions there?

Go ahead, Professor Arès.

[Dr. Mathieu Arès]

If it were my money, I wouldn't choose China. You can find the same thing somewhere else. If you want to sell to the Chinese, however, that's another story. If it's just production, I think numerous options are available. Vietnam, India and a lot of other countries in the region come to mind. Closer to home, Mexico is a possibility. They are similar countries, but the risk of political interference is lower.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I'll ask a question about Mexico in a second.

Professor Payette, what's your attitude towards investments in China? Would you risk it?

[Dr. Alex Payette]

It really depends on what you would ask me to invest in.

[John McKay, Liberal, Scarborough—Guildwood, ON]

It's any investment whatsoever—anything.

[Dr. Alex Payette]

Yes, sure.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Would you? Would you recommend to a pension fund that it invest in China?

[Dr. Alex Payette]

It's really on a case-by-case basis. Just in general, if the due diligence is done and the documents are clear, yes.

[John McKay, Liberal, Scarborough—Guildwood, ON]

You're not fussed about the geopolitical tension. You're not fussed by the fact that the Chinese government kidnaps our citizens and runs police intimidation operations here. The rules of law have kind of an occasional application. Are you not worried about any of that when you make your investment in China?

[Dr. Alex Payette]

It's not about this, though I do understand your point. If you asked me if I would invest in China, it's yes, but it really depends on what the targeted investment is. It wouldn't be just random.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Why does it depend on anything? China is well on its way to taking itself out of the realm of civilized nations. Any investment you make, no matter how benign, is a risk investment. I'm just curious. You're likely going to make an investment that makes you scads of money, but still, is your investment worthwhile if in fact President Xi decides that it's not?

[Dr. Alex Payette]

It really depends on your appetite for risk at this point. You need to understand that if you invest in something that could be socialized or taken away from you, this is part, to a certain degree, of the investment gain if you are willing to risk it. Then if you lose, you lose. That's just part of it.

Now, for other concerns—

[John McKay, Liberal, Scarborough—Guildwood, ON]

I just wonder whether we've appreciated fully the risk of expropriation directly or indirectly. Once you work your way through all of the ESG concerns and human rights concerns, perhaps we as an investing country don't appreciate the substantial risk of expropriation on the whims of one person.

[Dr. Alex Payette]

It's more than one person. It's more complicated than that. It's a bit more complex.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Well, we'd like to make it more complex than that; I agree with that. I just wonder whether it is, in fact, more complex than that.

How am I doing on time? Am I done?

[The Chair, Liberal, Ken Hardie]

You're done.

We have a little over five minutes left. What I'm going to propose is that we give Mr. Trudel half of it and Ms. McPherson the other half, and that will wrap up this panel.

Are you good with that, Mr. Trudel?

[Denis Trudel, Bloc, Longueuil—Saint-Hubert, QC]

Very good.

You've written books, Mr. Payette. In one, you wrote that, if the Chinese Communist Party failed to provide its population with a steady stream of socio-economic goods, the party-state could face a regime crisis. You say that would directly impact its resilience and even survival. That could affect investments in China, whether they're from the west or somewhere else.

I'm not sure whether you know this, but how would you assess the current state of the Chinese Communist Party?

[Dr. Alex Payette]

Yes, that's what we monitor day in and day out.

The party is still in a very delicate position. Broadly speaking, you have Xi Jinping and the new division of power, but how things develop within the party is something to pay careful attention to. The current team isn't especially strong. New education campaigns within China suggest that things may not be going as well as we think. The fact that China re-established a farm management office, after its demise in 1960, isn't a good sign in terms of grain control issues. I won't go on about grain, but there's something really significant about that.

The party is sending all kinds of signals in the way it's communicating. Some think it's code, but that's not the case. You have to know how to interpret what the party says. The party can be quite honest at times, so it's simply a matter of changing your interpretive lens. If you know how to interpret the signals correctly, you realize that Xi Jinping's position isn't as solid as you might think. Within the party, a lot of people are still being shuffled around. The people who were chosen to oversee the economy aren't people who should have been chosen, under normal circumstances. They aren't the best people for the job. The official line is that the reforms will continue, but which reforms? That's a whole other question, and it gives rise to considerations on many levels.

Could there be an economic crisis? Potentially, yes.

[Denis Trudel, Bloc, Longueuil—Saint-Hubert, QC]

You're saying that there is instability in China right now and that it may not be smart to invest there.

[Dr. Alex Payette]

Again, I would say it still depends on the investor's appetite for risk. Investors understand the risk. It's a bit more complicated for pension funds, which have to answer to future pensioners, especially when it comes to long-term planning.

[Denis Trudel, Bloc, Longueuil—Saint-Hubert, QC]

Mr. Arès, do you have anything to add on the stability of the Chinese regime right now?