U.S. Retirement Funds Split on China

The U.S. pension system takes a new look at China. The U.S. pension system takes a new look at China. Due to tensions between the two global giants, many fund managers are reevaluating their strategies. The attitude of U.S. public pension funds to China is fragmenting, reflecting mounting investment risks and the more acrimonious politics of the world’s two largest economies.

Officials of retirement plans are taking a variety of stances. California’s teachers’ pension fund began searching for its first specialized China stock managers in late August, while Texas’ teachers’ pension fund is halving its exposure to China stocks. Earlier this year, the Florida public-worker fund suspended new investment ideas in China, citing prior crackdowns on education and technology enterprises.

Pension managers are concerned about more than only Chinese politics. Sources familiar with the matter indicate that a significant pension fund in the Midwest decided not to participate in Chinese private debt in 2019 and 2020 out of concern that investment managers may be forced to sell at a loss if state or federal politicians imposed further limitations on Chinese investment.

Fund managers and pension officials believe this gap has been in the works for years. As seen by the abrupt stop of Ant Group’s first public offering two years ago and the ban on for-profit tutoring enacted last year, culprits include escalating political tensions between the United States and China. The increase in inflation in 2022, the risk of a military clash between China and Taiwan, and the worldwide sell-off in Chinese equities following President Xi Jinping’s consolidation have exacerbated these fears, according to investment managers.

North Carolina Treasurer Dale Folwell, who manages the state’s $110 billion pension fund, said whenever you see the sorts of drawdowns that we’ve seen in China, you have to be worried. Wednesday, China-related equities in the fund had a market value of $1.27 billion, down from $1.51 billion on September 30.

State and municipal authorities that administer around $5 trillion in retirement funds for teachers, firemen, and other public employees have increasingly resorted to China over the past two decades to fill financial gaps. In China, state-sponsored pension funds invest billions of dollars in private equity, venture capital, and real estate. Chinese stocks represent a growing proportion of foreign or emerging-markets equity portfolios at various state and municipal pension funds around the country.

The average percentage of public pension funds invested in emerging-markets stocks has increased to 7% from 3% in 2001, according to the Boston College Center for Retirement Research’s analysis of funds that provide such information. Typically, pension managers aim to meet or surpass foreign indices in which China comprises 10% or more. Because they don’t want to underperform the average by missing out on significant gains in one country, they tend to invest in all nations’ stocks.

The investment staff of the nation’s largest pension fund, the $430 billion California Public Employees’ Retirement System, spent “quite a bit of time” navigating Chinese markets. Dan Bienvenue, the fund’s interim investment chief, stated during a meeting last October. As of June 30, 2021, the fund has invested $11 billion in China across all asset classes. This comprises public and private equity and actual assets, such as land and buildings.

Last year, Calpers disclosed assets in New Oriental Education & Technology Group Inc., T.A.L. Education Group, and Gaotu Techtu Techedu Inc., companies impacted by for-profit education crackdowns. Before the government crackdown, the $290 billion California State Teachers’ Retirement System, the second-largest fund, had minimal exposure to Ant Group through its private-equity interests.

Both funds have disclosed assets in Alibaba, Baidu, JD.com, Pinduoduo, and NetEase, as they have numerous state pensions. This past week, Chinese equities listed in the United States lost tens of billions of dollars in market value after plummeting to their lowest level in over a decade. Since October 21, the Nasdaq Golden Dragon China Index, which measures hundreds of Chinese businesses listed on U.S.U.S. markets, has declined by more than 10%. The Hang Seng Index, Hong Kong’s primary benchmark, fell 8.3% for the week.

According to pension advisors, moves like the California teachers fund’s attempt to recruit China stock managers are uncommon. A person familiar with the fund, known as Calstrs, stated the move was part of an effort to diversify geographically as returns in Europe and the United States decline.

Meanwhile, the board of the $183 billion Teacher Retirement System of Texas agreed to reduce its target China stock allocation from 3% to around 1.5% of the fund this month. Pension officials highlighted a need for greater diversification in the emerging-markets portfolio, in which China equities comprised around one-third of overall holdings.

The revised allocation, whose implementation is estimated to take six months, will result in China’s goal weight slipping slightly below Taiwan’s. Last month, the fund stressed in a document that it had the right to reduce its Chinese assets “in accordance with its own economic and political judgment.”

In addition, the Texas fund abandoned plans to build a Singapore office almost three years ago. Officials judged that the fund could successfully manage regional assets from Austin, said investment chief Jacqueline Auby.

After Russia invaded Ukraine in late February, several pension authorities became increasingly wary about developing markets. Some international pension funds that attempted to withdraw monies from Russia discovered that their assets were blocked or lacked purchasers.

According to a transcript of remarks made by State Board of Administration temporary chief investment officer Lamar Taylor at a March trustees meeting, Florida’s $182 billion pension fund froze new investment initiatives in emerging countries such as China following the invasion of Ukraine.

Mr. Taylor mentioned several issues, including the tension in the Chinese real estate market and the government’s sometimes inconsistent responses in the technology industry and the for-profit education sector. In an August letter to the board’s investment advisory committee, he stated that China’s unwillingness to condemn the Russian incursion and the two nations’ prolonged partnership might have a negative impact on the value of Florida’s China assets.

Mr. Folwell of North Carolina stated that his fund has no plans to alter its China allocation, despite the numerous dangers of all types of investments. He stated, “It is the second-largest economy in the world.”