Evidence of meeting #9 for Canada-China Relations in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was companies.
A video is available from Parliament.
8:35 p.m.
Liberal
The Chair Liberal Ken Hardie
Thank you, Mr. Bergeron.
We'll now go to Mr. Boulerice for two and a half minutes.
8:35 p.m.
NDP
Alexandre Boulerice NDP Rosemont—La Petite-Patrie, QC
Thank you, Mr. Chair.
As democrats and human rights advocates, we are here to defend the rights of all people, whether they are Ukrainians, Uyghurs, Tibetans, or people in Hong Kong, but also the Palestinians, who are also under military occupation. Sometimes we would like to know if products are made in illegal Israeli settlements condemned by UN resolutions.
Ms. Murphy, how do we find out which products were made in Xinjiang province, possibly in forced labour camps, when we already have difficulty finding out which products were made in illegal Israeli settlements?
8:35 p.m.
Professor, Human Rights and Contemporary Slavery, Sheffield Hallam University, As an Individual
The work I do every day is to trace supply chains back to the Uighur region. We start with companies in the Uighur region and we see whom they say they're selling to and we are able to see full supply chains that reach from the Uighur region out to the U.S., Canada, the U.K. and EU. We often just use simple searches of the corporate records of companies operating in the Uighur region, where they announce clearly, both in their annual reports and in their PR releases and their social media, the big contracts they have won with international corporations or Chinese corporations operating internationally.
We then trace those companies to whom they're selling, through customs records that are available for 19 countries, though not available for Canada—and that's significant.
We're able to do it from our desks on the Internet with a paid subscription for a program that costs $7,000. That's it.
I think that not only can governments do it, but companies can and must do it and we need to stop making excuses for it. I do it every day.
8:35 p.m.
NDP
Alexandre Boulerice NDP Rosemont—La Petite-Patrie, QC
I would like to ask another question very quickly, if I am allowed.
Shouldn't our investment funds and our public or private pension schemes be a little more careful?
8:35 p.m.
Professor, Human Rights and Contemporary Slavery, Sheffield Hallam University, As an Individual
Absolutely.
Pension funds and investment funds can start by just looking at their investments and comparing them against lists that are publicly available. Jewish World Watch has a list of all companies that have been named in any report. Some of those companies will be famous international brands that are way down the supply chain, but the Jewish World Watch database shows you where in the supply chain they are and what their connection is to the Uighur region.
Investment funds, both active and passive, should be comparing their investments against those lists. If it's going to take people who have those pensions doing that work for them and calling them to account, we're all here saying that we're doing it and it's time that the government says that the [Technical difficulty—Editor].
8:35 p.m.
Liberal
The Chair Liberal Ken Hardie
Ms. Murphy, I'm sorry. Your connection froze there for a second, but we are out of time.
It is time to release you at what must be after 2:30 in the morning your time. We very much appreciate your presence here, as we do with Dr. Dufour.
Mr. Tohti and Mr. Masimov, thank you both for being here.
We will now pause while we get our third and final panel ready to go.
8:44 p.m.
Liberal
The Chair Liberal Ken Hardie
Welcome back, everybody.
It's time now for our third panel.
I'd like to welcome the witnesses who are joining us by video conference today.
We have, as an individual, Sam Goodman, author, director of policy and advocacy, Hong Kong Watch, and co-founder and co-chair of New Diplomacy UK; and from Hong Kong Watch, Aileen Calverley, co-founder and trustee.
Mr. Goodman, you'll have five minutes for your opening statement.
8:45 p.m.
Sam Goodman Author, Director of Policy and Advocacy, Hong Kong Watch and Co-Founder and Co-Chair, New Diplomacy UK, As an Individual
Thank you.
I would like to thank members of this committee for inviting me here to give evidence today.
8:45 p.m.
Bloc
Stéphane Bergeron Bloc Montarville, QC
I just want to make sure that the sound tests have indeed been successfully completed.
8:45 p.m.
Liberal
8:45 p.m.
Author, Director of Policy and Advocacy, Hong Kong Watch and Co-Founder and Co-Chair, New Diplomacy UK, As an Individual
Thank you.
I would like to thank members of this committee for inviting me here to give evidence today. I sincerely hope that this inquiry can be part of the more honest conversation about the very real risks for ordinary Canadians of their pension funds being invested in Chinese stocks and government bonds. These risks are far too often ignored in the pursuit of short-term gains for too many fund managers distracted by the allure of China's financial markets and a myth that China is too much of an economic opportunity to ignore.
The research that Hong Kong Watch has undertaken over the last 18 months into Canadian pension funds has warned that some of Canada's largest publicly controlled pension funds may have exposure to Chinese companies that are involved in human rights violations in the Xinjiang region. A year ago, we found that the Canada Pension Plan Investment Board and provincial pension funds, like CDPQ in Quebec and BCI in British Columbia, had direct holdings in Chinese technology companies blacklisted by the U.S. for their links to internment camps in Xinjiang and other large technology companies complicit in oppression in China, including Alibaba and Tencent.
I am happy to say that many of these funds have divested most of these direct holdings, but some remain passively exposed to index tracking funds such as MSCI China and MSCI Emerging Markets, which hold 12 and 13 companies, respectively, that are linked to Uighur forced labour.
In the case of the CPPIB, its most recent holdings, published on March 31, 2022, confirmed that it has $6.4 billion exposed to MSCI China and $7.7 billion exposed to MSCI Emerging Markets. Meanwhile, the Royal Bank of Canada, through its partnership with BlackRock, is offering pension fund products directly to the Canadian public which track the MSCI Emerging Markets index. Sadly, the current information these funds provide publicly is far too opaque for the ordinary lawmaker, let alone the ordinary Canadian citizen, to have a proper understanding of their pension fund's exposure to China.
Most of the provincial and federal pension funds I've looked at do not publish a regular and up-to-date list of their full holdings. In some cases, the holdings listed are out of date by a year.
The other issue regularly encountered includes pension funds outsourcing their fund management to private fund managers of private equity firms, which, in effect, outsource human rights and governments' due diligence to third parties.
It may not be sexy, but there is an urgent need to require Canadian pension funds to regularly publish their full holdings publicly, the holdings of their private funds managers and their passive exposure index funds like NSCI.
More broadly, I believe investing in China is increasingly incompatible with upholding environmental, social and governance criteria, which all major pension funds in Canada claim to do. Over the past few years, rising investment in Chinese stocks and bonds has coincided with the boom in ESG investing. According to Bloomberg, ESG assets passed $35 trillion in 2020, to become a third of total global assets under management, yet many have now concluded that investing in Chinese stocks and bonds is incompatible with ESG, including leading figures in the investment community like George Soros and Baroness Helena Kennedy.
Taking the “E” in ESG, climate activists have long argued that investment in Chinese state companies, like Sinopec, which stand accused in some cases of producing higher levels of carbon emissions than some entire developed countries, can hardly be considered beneficial to the environment.
When it comes to the “S” in ESG, human rights groups like Hong Kong Watch have warned investors about the rising social risks of investing in Chinese companies linked to forced labour when larger technology companies, like Alibaba and Tencent, are working hand in glove with the Chinese state to surveil the populace and censor the Internet.
Looking at the “G” in ESG, Xi Jinping’s crackdown last year on the technology and education sector, and Putin's war in Ukraine have raised legitimate governance risks in a country that has no separation between private enterprise and the state. One man can wipe out whole industries at the flick of a pen.
The purging of reformers from the central committee at the recent party congress and the doubling down on zero-COVID policies only increase governance risks of investing in China, and have led to the mass protests we are currently witnessing across China. I believe it is well past time that law-makers consider sensible regulations to define ESG, to label China as an ESG risk and to introduce a blacklist like the U.S.A.'s to restrict investment in Chinese firms with questionable human rights, environmental and governance credentials.
Finally, I urge the committee to invite pension funds to give evidence and explain why they are so happy to operate under a smokescreen that deprives the Canadian people of the opportunity to fully understand where their pensions are being invested and the real risks involved.
Thank you.
8:50 p.m.
Liberal
The Chair Liberal Ken Hardie
Thank you, Mr. Goodman.
Before we get to questions, I will ask you to move your microphone boom up to just halfway between your upper lip and your nose. That would be just perfect. Thank you.
We'll now go to Ms. Calverley for her opening statement of five minutes or less.
November 29th, 2022 / 8:50 p.m.
Aileen Calverley Co-Founder and Trustee, Hong Kong Watch
Thanks to the committee for giving me this opportunity to talk about Canada's pension fund investment in Chinese equity.
I want to raise a wider issue for Canada's pension funds and other institutional investors. By holding Chinese stocks of any kind, investors are taking on China's country risk. China has become a big part of the international indices. At the end of October, the MSCI Global Emerging Markets index was about 27% in Chinese stocks. Canadian pension funds invest directly in Chinese stocks, not just in passive index funds. Up until March of this year, CPPIB held 189 Chinese stocks.
Chinese stocks have in fact performed very badly in recent years because of all the problems in the economy. China's country risk has also become increasingly political. Many international investors are worried about geopolitical risks, especially after what happened when Russia invaded Ukraine. In February, international investors found their holdings in Russian stocks frozen due to international sanctions and Russian actions. Russia does not allow foreigners to buy or sell stocks or to exchange rubles for dollars, so investments in Russia are frozen. Many investors have realized big losses. BlackRock alone lost $17 billion of its investors' money.
Another example is an MSCI Russia Fund that is traded in the U.S., which invests only in Russian stocks. It is currently being liquidated, having lost 99.8% of its value this year. What if that were to happen with Chinese stocks?
Relations between the U.S. and China have become more difficult in the last few years, with several potential flashpoints. Taiwan is the biggest one, but there are several other disputed territories in the Indo-Pacific region that could trigger a conflict between the U.S. and China. If a confrontation occurs, there are various scenarios ranging from limited sanctions being placed on China to actual war between the U.S. and China. In any of these scenarios, Canadian investments in China could be at risk. The U.S. defence chiefs have warned that China could invade Taiwan in coming years. There is speculation that Xi Jinping wants the so-called recovery of Taiwan to be part of his legacy.
If China were to attempt an invasion of Taiwan, there is a strong chance that the U.S. could respond. President Biden has said that America would act, but for sure we would see sanctions. Such sanctions could see retaliation by China against foreign investors.
Many people believe that China would not risk such an attack—at least not for some years—but China may have other options to put pressure on Taiwan, such as a trade blockade. A recent report by the U.S. State Department has warned that a China blockade of Taiwan could spark $2.5 trillion in annual economic losses for the global economy. To put this into perspective, this would be larger than the global economic loss in the 2008 financial crisis, which cost the economy $2 trillion.
Again, Western sanctions would be a real possibility if this was tried, with the potential for Chinese action against foreign investors, which would damage Canadian pension funds.
Another potential trigger for Western sanctions could be if China clamps down on dissent in the country. This week there have been protests in China over the COVID lockdowns. If these escalate further or another issue arises in coming months or years, a heavy-handed response—something like the Tiananmen Square massacre in 1989—could see a Western response.
It's worth bearing in mind that a conflict between the U.S. and China at any level would likely see stock markets falling everywhere, so pension fund assets would likely be down across the board, potentially threatening the payment of pensions. Canadian pension funds could face total loss on their investments in China.
This is a major potential problem for the Canadian government. Imposing sanctions could force losses on government pension funds.
I have two recommendations.
The first is on country risk analysis. We need to know more about the size of pension fund investments in China, how they are monitored and managed, and whether investment managers fully understand the risks they are taking. Is there any regulation on disclosure? A country risk analysis should be included in the Indo-Pacific strategy.
Secondly, publicly controlled pension funds should be encouraged to avoid exposure in China.
In terms of fund tracking, there are several funds covering emerging markets in Asia, excluding China, so there is no need to hold Chinese stocks to get more emerging market exposure.
In conclusion, I would urge the committee to recognize the increasing country risk associated with investments in China and plan accordingly.
Thank you.
8:55 p.m.
Liberal
The Chair Liberal Ken Hardie
Thank you, Ms. Calverley, I appreciate the input.
We will now go to our first round of question with Ms. Dancho, for six minutes or less.
8:55 p.m.
Conservative
Raquel Dancho Conservative Kildonan—St. Paul, MB
Thank you, Mr. Chair, and thank you to the witnesses for being here. I greatly appreciated your opening remarks.
I want to dig in a bit to some of the things you shared with the committee. They're quite shocking for someone who perhaps doesn't understand how Canada's pension funds are invested in various industries and different countries around the world. Given what we're learning about how China treats the Uighurs—we just had a panel with a testimony on that right before you—and what it's done to Hong Kong, which you know extremely well, much better than I, including the threats, and talking about Taiwan....
Could you explain a bit in more detail to what extent are Canada's pension funds invested in Chinese companies in China? Is it all of our pension funds, or is it the vast majority of our Canadian pensions, for example? Can you elaborate a bit more?
Whoever would like to go first.
8:55 p.m.
Author, Director of Policy and Advocacy, Hong Kong Watch and Co-Founder and Co-Chair, New Diplomacy UK, As an Individual
It would be a heavy weighting of pension funds that are looking at emerging markets. Often, the way the pensions are banded together.... Obviously, when you're younger—I guess I'm not that young, but kind of youngish—more of your pension will go to emerging market funds, because in theory you'll get a higher return, but there's also a higher risk. Obviously, that should be phased-out as you get closer to retirement age.
The problem that Ms. Calverley summarized very well is that many of the emerging market funds are heavily weighted to China to a point where some of these funds might have a third of their stocks in China, in government bonds and equities, and that's just too high of a risk, really. It does vary from pension fund to pension fund.
Again, it goes to the point that I was trying to make. I don't think that a lot of these pension funds are being honest about the holdings they have in China, because they're not properly publicly disclosed.
8:55 p.m.
Conservative
Raquel Dancho Conservative Kildonan—St. Paul, MB
Thank you for that.
Ms. Calverley, you spoke specifically on how this puts our pension funds in danger. You tied it to a Chinese invasion of Taiwan and a U.S. response. That would throw everything that's been invested in China into disarray, and could threaten the stability of our pension funds. I see nodding from Mr. Goodman.
Can you confirm what I've relayed to you? Is that correct in my meaning, what you've said?
9 p.m.
Co-Founder and Trustee, Hong Kong Watch
Yes. The situation is actually very serious. I think talking about a war between the U.S. and China and Taiwan is the worst scenario. But I think even without that, even with a trade blockade, that would be a huge blow to the world economy and to our pension funds. A blockade would hurt the supply chains, for example, from Taiwan and China, and also the trade finance. I think a lot of the time we only talk about goods, but we forget about the finance behind the trade. When something happens like that, even the finance will stop—we can see the situation in Russia. If we're talking about outright war, that will be very serious. I would see Chinese stocks actually wiped out, the same as the situation in Russia especially.
I want to go back to your first question.
Actually, there are many pension funds in Canada. They have holdings in emerging market funds. So, 27% of emerging market funds actually invest in China. Also, they possibly have investments in individual stocks as well.
I can give you some lists. Actually, it's a very long list. I don't want to use a lot of time. Of course, there are the Canada Pension Plan Investment Board, the Alberta Investment Management Corporation, Manitoba Civil Service Superannuation Board, the Public Sector Pension Investment Board, British Columbia Investment Management Corp., and the Investment Management Corporation of Ontario.
I think it's very important that there should be a regulation that pension funds need to have disclosure. We have done research and looked into the holdings, but a lot of them do not show up. The Canada Pension Plan Investment Board shows the plan's stock holdings, and find there are 589 Chinese stocks among them, the second-largest holding after U.S. stocks. That is striking.
9 p.m.
Conservative
Raquel Dancho Conservative Kildonan—St. Paul, MB
Thank you for outlining that.
Perhaps I may just interject with our remaining minute. The pension funds you mentioned are a number of provincial government pension funds and the national pension we all pay into, whether we work for the government or not—but certainly the provincial ones were the provincial government funds.
9 p.m.
Conservative
Raquel Dancho Conservative Kildonan—St. Paul, MB
The federal government recently put out its Indo-Pacific strategy, as I'm sure you are aware, and it really emphasized the importance of pursuing Canada's values in our foreign affairs in this region. From what you've shared, though, and what this committee knows very well, what's going on with China and what they're doing to their people and the like, you're saying we should restrict Canada's investment of our pensions in China.
What we're seeing in the Indo-Pacific strategy about values, and the government's wanting to pursue those values, doesn't seem to line up to your point with how we invest our government pension.
With my remaining time, I open the floor to you, Mr. Goodman, and then Ms. Calverley as well, just to comment. How can we align our strategy with where we're putting our money, I suppose?