Canada pension fund to lift China investment

CPPIB plans to increase funding across country as it eyes long-term market opportunities from growing middle-income group, aging population

By 2025, Canada Pension Plan Investment Board plans to have 20 percent of its estimated C$800 billion ($612 billion) assets invested in the Chinese mainland, Hong Kong, Macao and Taiwan, said Mark Machin, president and CEO of CPPIB.

"It's a sensible thing to increase our supply to this market. We are building expertise, and we think valuation is not perfect in this market, so there are opportunities for skilled investors to find really good value," Machin said during a recent business trip in Beijing.

The further opening-up of China's financial markets to foreign investors has also increased the CPPIB's confidence in making greater investments in the world's second-largest economy, he said.

China is also undergoing significant population changes, including a growing middle-income group and an aging population. With expected spending increases in education, financial services, health and elderly care, the Toronto-based global investment manager is eagerly eyeing China's growth markets.

Currently, the CPPIB's asset allocation in China is broadly diversified, with investments in the A-share market through both the Qualified Foreign Institutional Investor program and the mainland-Hong Kong stock connects. The institutional investor is starting to participate in the bond market via the bond connect program and has access to the interbank market.

In an interview with China Daily, Machin shared his views on China's pension system and further opening-up, as well as the CPPIB's investment strategy in the country.

What experience could China learn from the Canadian pension system?

The Canadian pension system was developed all the way back in the 1890s. There has been a lot of experience gained, lessons learned and mistakes made over the years.

One of the things we learned is that a multi-pillar system is the way to go. So it's important to have a system where you have the government system, plus company pensions, personal pensions, life insurance, etc. All of those need to be developed and work alongside each other. You can't just have one pillar providing everything, and you need some type of consistency across those, and incentives that work to encourage people to save.

The other thing is the way that pensions are managed in Canada. Government-related pensions are unique in that they are put at arm's length from any government involvement in the investment process. The governance is very strong. It allows the building of expertise and professional management of the funds.

What are the major challenges facing China in terms of the pension system?

The main challenge at the moment is the returns that the various parts of the pension system earn. Due to a limited range of investments, the returns are pretty low on a lot of pensions.

Another challenge is that the funding of the system continues to need improvement. I think the transferring of a part of State-owned enterprise ownership to the National Council for Social Security Fund is a very good move. That will help to improve funding for the overall system.

The consolidation of provincial pension systems to be managed centrally is a good move as well, so they can be managed with transparent, strong and robust governance.

What will be the effect of China's policies to further open up its financial markets to foreign investors like CPPIB?

The opening-up is really, really good and will encourage more and more investors to invest here. It's an important moment for China to decide whether to really open up or whether to slow down the opening-up, given internal and external challenges.

I encourage much more bold opening-up, which will improve the vigor of the economy here and the strength of the markets.

Right now, about 8 percent of our funds are invested in the Chinese mainland and about 10 percent of our funds overall are invested across the Chinese mainland, Hong Kong, Macao and Taiwan. We expect the latter to increase to 20 percent by 2025.

We are already involved in the QFII and the mainland-Hong Kong stock connects. We have joint ventures here in logistics and real estate. We have invested in companies like Alibaba and Postal Savings Bank of China. We have a very broad portfolio here across many aspects, and we're going to continue to grow that over time.

The more open China is, the more confidence we have to deploy more money here. We expect to have up to a third of the fund invested in emerging markets by 2025, and China will be at least half of that.

Your investment portfolio in China seems to be a major bet on the country's consumption growth. Right now, there is sentiment that China's consumption is downgrading. How do you view that?

Our investment portfolio in China shows the demographic trend of the growing middle-income group. The typical sectors we are looking for are the ones that are going to be exposed to the rise of middle class prosperity.

People are going to spend more on education, financial services, and both online and offline retail. We are also looking at healthcare and other services that would be important for the aging population. For example, in Europe we have invested in a long-term care provider ORPEA, which has already established operations in China.

Right at this moment, if we were a short-term investor, the consumption would be a doubt. But in the longer term, with the growing prosperity of the country over time, there will be demand for consumption growth in these areas. I don't think there will be a downtrend of consumption over time.

What is CPPIB's plan to invest in services for the aging population in China?

I'd like us to find ways of investing in this aging demographic. It's something that should be really aligned to what we do and our expertise. We haven't found the best business model and the best partner to work with yet, so we continue to explore it.

A lot of people have been trying to find a business model that works. It's not just real estate development. There are a number of models whereby you try to keep people living as independently for as long as possible in communities; and when they can't live independently, there is assisted living; and when they need end of life care, the healthcare is there. It can all be in one community that works well and is near family as well.

We have invested in Europe in the end of life care. It's high-end and a combination of healthcare and old age care.

We have a lot of research around the world in aging demographics. I'll give you an example that you won't expect: In the US, as baby boomers are aging, a lot of them want to go and see Europe. One of the best ways to see Europe is to go on a riverboat. So we invested in a company called Viking Cruises, and a huge number of passengers are aging US citizens.