Canada-China Relations Committee on May 8th, 2023

[Eduard van Gelderen]

Thank you.

I would answer your question in the following way.

Our mandate that we get from the government is actually a very beautiful mandate, because it provides a lot of flexibility in terms of where and how to invest. For example, many people will claim that you have to build up a global portfolio according to GDP numbers, but there's nothing in our mandate to say that we have to have, let's say, 20% in China because it's 20% of global GDP.

When we start to build our policy portfolio and our strategic portfolio, we do take the world into account, but we start off with in-depth analysis of the different regions and countries. Again, we dice and slice this in many different ways to get a real feeling for what this country or region is about.

If there—

[The Chair, Liberal, Ken Hardie]

Excuse me, Mr. van Gelderen. I'm afraid we've run out of Mr. Fragiskatos' time.

We now have to move to Mr. Trudel for six minutes or less.

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

Thank you, Mr. Chair.

Thank you very much, gentlemen. You can't imagine how pleased I am about being able to hear witnesses speak French. This evening, the committee has heard more French spoken than when members of cabinet speak in the House of Commons.

This afternoon, something rather unusual occurred when a Chinese diplomat was expelled by Canada. Did that raise any alarm bells? Did you say to yourself that China would probably retaliate, likely in the form of sanctions? We can certainly expect a response from China. Did you perhaps think there might be an impact on the investment funds you manage?

Mr. Batani or Mr. Delisle, did this geopolitical event lead each of the organizations you represent think about what might happen, and what its impact might be?

[Vincent Delisle]

I'd like to return to one of the subjects we discussed this evening.

Portfolio diversification enables us to diversify risks, no matter what the region or sector. We try to mitigate eventualities. An ad hoc event doesn't change how the portfolio is structured. When we see events on the horizon that change the relationship between risk and performance, which is what a portfolio is built around, then of course we ask ourselves some questions. We ask questions like this often, no matter what the circumstances. We wonder how the geopolitical and macroeconomic contexts are changing and adapt the portfolio accordingly.

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

Mr. Leduc, do you have anything to add?

[Michel Leduc]

Thank you.

I'll just complement what my peer suggested. I won't add.

Definitely, diversification is critical. It's true that in the last couple of years, these events have been impacting bilateral and multilateral relations. When there's an event, sometimes there is a secondary event and tertiary events, and what we're finding is that there's no place to hide. The increasing level of diplomatic friction among some of the large markets that we invest in is something that we have to be very well aware of, and we have to go in with eyes wide open. As my peer suggested, diversification is the most powerful antidote to these events, and they're happening with increasing frequency.

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

Do you think there is a risk that China, as a form of retaliation, could do something like confiscate your current assets?

[Michel Leduc]

I don't think it would be constructive for me to speculate on what China might do, but it is the type of reaction that we've seen around the world. We won't speculate on that, but it's something that we always have to brace ourselves for.

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

All right.

Mr. van Gelderen, would you like to add anything?

[Eduard van Gelderen]

I have an answer similar to those of my two colleagues.

The event this afternoon for sure was noticed. It was discussed immediately with my team in Montreal in terms of how it will impact the pricing of geopolitical risk.

That's a very difficult topic, to be honest, because it's not isolated. When something happens in one country, it immediately has an impact on another country too. Diversification is one of the tools, the methods, to mitigate that risk. However, for sure we will have another discussion on what this means and whether enough of the risk is priced into the different markets.

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

As we saw this afternoon, it's the tip of the iceberg for a situation that has been ongoing for a few weeks, or even a few months, now.

Generally speaking, do your organizations believe that the risk level is higher? If so, was a new analysis done? Are you beginning to think that investing in China could be a problem?

I'll ask Mr. Leduc to answer first.

[Michel Leduc]

We also have to be very cautious to not be episodic and not overreact to events.

Again, I'll lean on our exceptionally long investment horizon and thinking about the importance of being exposed to emerging markets, knowing full well that there will be risks from time to time.

I would say that the overall geopolitical situation over the last five years has intensified. Those risks have increased in terms of portfolio construction and in terms of the sorts of factors that we're comfortable with.

It's a continuous process, based on a natural rhythm of thinking through what our risk appetite is among different sorts of risk. There are a variety of different trigger points that ensure that process happens. For example, most recently, the chief actuary of Canada did a very extensive, thorough review of the sustainability of the Canada pension plan, and there are a lot of forecasts and adjustments. That gives us an opportunity to assess where the fund is going in terms of the projections over the 75 years and to test whether our risk appetite continues to be prudent.

The same applies to other sorts of risk. Our approach is to develop a portfolio that will help sustain the fund, taking into account factors that drive that sustainability, being very well aware of the increasing geopolitical risks and other forms of risk, and taking into account the continuous, systematic process for portfolio construction and not being driven by episodes.

[The Chair, Liberal, Ken Hardie]

Thank you, Mr. Leduc. Thank you, Mr. Trudel.

Next is Ms. McPherson. You have six minutes or less.

[Heather McPherson, NDP, Edmonton Strathcona, AB]

Thank you very much, Mr. Chair.

Thank you all very much for being here this evening.

I know it's painful sometimes for all of us to be here late at night on a Monday. It's time that you probably could be spending with your families, so thank you very much for taking the time to share your expertise with us.

I'm not an expert on any of this, so I appreciate your bringing your expertise here.

This is one of the questions I have, and I'll ask it to each of you.

How ownership is determined within many different investment structures can be very complicated. For example, we know that in sub-Saharan Africa, much of the infrastructure is being funded by the Chinese government. We know that China has many assets throughout the world.

How do you determine that you are not in fact investing in Chinese companies? How do you measure that risk, knowing that it is not just what's happening in China but what's happening around the world as Chinese presence continues to spread through their belt and road initiative?

That's something I am interested in.

Mr. Batani or Mr. Delisle, I would perhaps start with you.

[Vincent Delisle]

The purpose of our exposure in China is to provide us with a form of sectoral diversification in areas that we don't find in other geographical locations. As I mentioned in my address, we decided to place an emphasis on liquid markets for our investments in China, which allows us to change our minds and resell these assets if circumstances call for it.

The investment process, whether in China or elsewhere, is the same. It is rigorous in terms of ESG indicators. In China, we need to consider not only our national exposure, but also the major American or European multinationals that do business there. Domicile is an important consideration for us, but the process to which we are subject is even more so. We're talking about China today, but virtually any company included in our portfolio is subject to the same criteria. Whether these are ESG indicators or other criteria, we assess the risks.

[Heather McPherson, NDP, Edmonton Strathcona, AB]

Thank you.

Mr. Leduc, I met with you and Mr. Downing about a year ago to speak about the Canadian pension plan. Thank you for being here.

I'd love to be able to ask you some questions about the Alberta pension plan, but I don't think that's the topic we're working with today.

Could you comment on how the CPP manages those risks?

[Michel Leduc]

It's a very good point.

When we think about the opportunities and risks associated with investing in China, we see that they're not limited to those geographic borders. We believe strongly that in order to get growth and the resilience for the fund over our investment horizon, we need exposure to emerging markets, and you can't be exposed to emerging markets without understanding China. It is a disproportionate amount of that emerging market.

That means being well aware of its place in the world as a large exporter. Our approach to engaging and investing in China begins by truly doing our homework, our due diligence, and it comes down to the “how”. The low-cost approach of passive investments doesn't allow us to really understand those risks. We believe in being an active investor and understanding the sectors we're comfortable with and understanding the sectors that we're simply not comfortable with. The “how” really matters in that context.

[Heather McPherson, NDP, Edmonton Strathcona, AB]

Thank you.

Go ahead, Mr. van Gelderen.

[Eduard van Gelderen]

I have one thing to add to what my neighbour just said.

This is not something that suddenly popped up. China and Asia have been very powerful forces for decades already. In the global economy, the interdependencies are huge, so your point is spot-on. It's not a bloc that you can ignore, because the interdependencies are so huge, even within the U.S. or Europe and China.

I totally agree with my neighbour that a long-term investor should be an active manager and should spend the time and the effort to really understand the value chains and business models to get a better grip and a better understanding of how things work and where countries have an impact or do not.

[Heather McPherson, NDP, Edmonton Strathcona, AB]

Just to follow up on that a bit, yes, the growth of China's investments in different places around the world hasn't been going on for a very long time, but I think there's a new belligerence that we are seeing from China. It could be echoed very much by investments that may be made in Russian investments. We've now seen that the reality on how we manage that has changed very quickly.

Knowing those changing levels of belligerence or the changing levels of how the Chinese government is acting, do you trust that the majority of pensions.... You don't even have to speak about your own. Do you feel that Canadians are protected? Do we have enough legislation in place? Are we doing enough to protect against the risks that perhaps are increasing?

[Eduard van Gelderen]

Well, I would—

[The Chair, Liberal, Ken Hardie]

Excuse me, Mr. van Gelderen. We've come to the end of Ms. McPherson's time.

[Heather McPherson, NDP, Edmonton Strathcona, AB]

I'm sorry.

[The Chair, Liberal, Ken Hardie]

She will have another turn to ask you some questions.

We now go in fact to our second round. We'll begin with Mr. Seeback for five minutes or less.

[Kyle Seeback, Conservative, Dufferin—Caledon, ON]

I'm going to try to ask direct questions very quickly to see if you can answer them quickly, because I have only five minutes.

You mentioned that you're aware of the executive order in the United States that listed 59 entities that the United States has banned. Do any of your investment funds have direct or passive investments in those 59 entities?

I'll start with you, Mr. van Gelderen, and then we'll just work our way down.