CalPERS takes a field trip to China

Following a recent fact-finding trip to China, the board of CalPERS is re-assessing its investment strategy in the world’s most populous country. By Paul Fruchbom.

Late last year, a ten-person delegation from the California Public Employees’ Retirement System returned from a 12-day fact-finding mission in China. The trip was notable for all the obvious reasons – the biggest pension fund in the US visiting the biggest country (by population) in the world – and for the not-so-obvious: CalPERS doesn’t technically invest in China.

Each year, the pension fund produces a permissible equity market list delineating which countries it feels are stable enough for investment – China, due to its record of human rights abuses, limited transparency and poor legal controls, has not made the cut.

All that may be changing, however. Earlier this year, CalPERS allowed its real

While you see the growth opportunities in China it is still a communist nation that is learning about free-market economics.  When you go for a blend of two systems that are incompatible one of them has to give, and the question is which one will it be?”

Mark Anson, former CIO of CalPERS

estate division to bypass the restrictions – the pension fund can now invest up to $650 million in funds that invest outside of the permissible equities markets list. And while CalPERS itself is prohibited from investing in China, the pension fund has significant indirect stakes in private equity firms such as The Carlyle Group and TPG/Newbridge, both of whom have been active in the country recently. This past summer, Mark Anson, the former chief investment officer who recently left CalPERS for Hermes Asset Management, noted that he anticipated China reaching permissible status in 2006. The annual rankings come out in February.


Anson: China a study in contrasts

Nevertheless, hurdles remain. While areas such as private equity and real estate appear to be “safer” than others, politics and recent turmoil in China – including environmental catastrophes and reports of violent suppression – provide reasons for caution. CalPERS’ in-state neighbor CalSTRS has recently come under pressure from California State Treasurer Phil Angelides to divest its holdings in PetroChina after a recent explosion at a company plant that led to several deaths and contamination of the local water supply. In its report to the CalPERS board, the members who traveled to China noted that the country is still an emerging economy filled with difficult contrasts between rich and poor, law and corruption, capitalism and communism.

“While you see the growth opportunities in China it is still a communist nation that is learning about free-market economics,” Anson told Asia Money earlier this year. “When you go for a blend of two systems that are incompatible one of them has to give, and the question is which one will it be?”

For the growing number of private equity and venture capital firms rushing to cash in on the Chinese market, that question has already been answered. After all, billions and billions of private equity dollars can’t all be wrong, can they?