Despite Concern From Lawmakers, US Pensions and Endowments Pour Into China

American public pension funds and university endowments continue to invest billions in China, according to a report from Future Union, an advocacy organization. The “Rubicon Report” criticizes institutional investors and funds for financing what the organization calls adversarial states.

According to data collected by Future Union, public pension funds in 43 U.S. states currently hold investments in China and Hong Kong, according to private and public databases as of June 30. Of the 74 largest pension funds, 29 have made investments in the past 12 months, while 56 of the 74 have made follow-up investments in China in the past 36 months.

In the past 36 months, U.S.-based public pension funds have invested more than $68 billion in China, according to the report. Some of the largest allocators include the California Public Employees’ Retirement System, which has made 80 investments totaling $7.86 billion; the San Francisco Employees’ Retirement System, which has invested $3.38 billion over 80 investments; the New York State Common Retirement Fund, which has invested $8.392 billion over 72 investments; and the California State Teachers’ Retirement System, which has invested $5.56 billion over 58 investments, according to the report.

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“CalPERS is a global investor and believes diversification is a key component to generating the returns needed to meet the retirement security of our 2 million members,” said a spokesperson for CalPERS, at $444 billion the country’s largest pension fund, in response to a request for comment. “We are closely monitoring discussions in Washington and elsewhere and, as always, will comply with any additional government requirements that might be initiated.”

CalSTRS, which with assets totaling approximately $317.8 billion is the second-largest pension fund in the U.S., also responded.

“As of December 31, 2022, approximately 1% of the CalSTRS Investment Portfolio was invested in Chinese public equities,” a fund representative said. “The vast majority of our Chinese holdings are in public equities, and we are in full compliance with President Biden’s executive order. Though China is part of the global market index and is the second-largest economy in the world, our exposure is modest and fell to No. 14 on our rankings of total fund exposures by parent country as of February 2023.”

CalSTRS also clarified that it intends to hire dedicated China managers to analyze environmental, social and governance risks with first-hand knowledge.

Some of the largest university endowments with investments in China include the University of Michigan, which has invested $1.57 billion across 83 investments; the Texas Permanent School Fund, with $1.97 billion invested across 9 investments; and the University of Texas System’s endowment, with $1.6 billion invested over 29 investments. None of the asset owners cited above, beyond the two California pension funds, responded to requests for comment.

Earlier this year, the board of the Federal Retirement Thrift Investment Board, the country’s largest defined contribution plan, voted to change the benchmark for its international fund to all investments in China, preventing exposure to these investments for federal employees.

Future Union, as an advocacy group focused on encouraging democratic values, criticized institutional investors for continuing to invest in an adversarial nation.

“This Rubicon Report initiative is designed with a single goal in mind: to catalyze and ensure that institutional investors, funds and leaders champion free and fair markets that uphold democratic values,” the report stated. “Given technology’s essential place in a global civilization, Future Union believes that there is a direct connection between the startup companies driving innovation and countries who prevail in the reordering of the geopolitical landscape.”

Lawmakers in multiple states have taken steps to ensure that pension funds in their states divest their investments in China. The Missouri State Employees’ Retirement System’s board recently voted to divest all of its holdings in China.

Some institutional investors have already pulled back from China, such as venture capital firm Sequoia Capital, which recently finalized its separation from its China business in December. Still, many institutional investors see strong opportunities in China, despite concerns from lawmakers and analysts.

CalSTRS Winnows Candidate List for China Equities Manager

The Problem with Pulling Out of China

Tags: China, Future Union, Pensions

The U.S. 5th Circuit Court of Appeals Tuesday formally vacated the share repurchase rule that had been finalized by the Securities and Exchange Commission in May.

The rule required issuers to disclose their daily stock buybacks on a quarterly basis. The disclosures were to include the pricing and volume of the buybacks, as well as the rationale behind the buyback program. Additionally, the rule required issuers to disclose their policies regarding executives trading in company stock.

According to the SEC, the rule was primarily intended to reduce information asymmetry between the companies issuing stock and investors; reduce opportunistic buybacks and insider trading; and improve price discovery. The disclosure regime under the rule would have made it more difficult for corporations to initiate a buyback program on the basis that their stock was undervalued. Similarly, the rule would have revealed if buyback programs were motivated by executive compensation schemes related to stock pricing.

The rule was challenged by the U.S. Chamber of Commerce in May. On October 31, three judges from the 5th Circuit ruled that the SEC had not done a proper cost-benefit analysis during the finalization of the rule. According to the ruling, the SEC did not adequately consider comments that suggested the SEC should study how often buybacks triggered executive bonuses, the impact of incentive compensation related to stock prices, and the economic benefit of reduced information asymmetry. As such, the appeals court found that the SEC’s adoption of the rule was arbitrary and capricious and violated the Administrative Procedures Act.

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The court gave the SEC 30 days to remedy the issues. When, on November 22, the SEC asked for an extension, the court refused. The SEC then filed a letter on December 1 stating it could not “correct the defects in the rule” on the court’s 30-day timeline. Accordingly, the 5th Circuit vacated the rule on December 19.

Jay Gould, a special counsel with Baker Botts LLC, explains that under the APA, a federal agency must consider the comments it receives. Adopting statements issued by the SEC generally explain how the commission considered the comments and which of the comments influenced changes between an initial proposal and a final rule and why other comments were not considered. If the SEC fails to do this, “the rulemaking is deemed arbitrary and capricious.”

If the SEC appealed the case to the Supreme Court, the SEC would likely lose, Gould says. Instead, the SEC will likely “go back to Square 1 and re-propose the rule.” The rule was vacated on procedural grounds but is otherwise “entirely consistent with the securities laws” and dealt with creating “orderly capital markets.” The SEC may be successful on a second try, but the process could take a year or longer, Gould says.

Absent the vacated rule, stock issuers must still disclose less-specific information about buybacks on forms 8-K and 10-Q, aggregated on a monthly basis, rather than a daily basis.

The SEC’s rule was part of a broader effort to reign in buybacks. The Inflation Reduction Act of 2022 implemented a 1% tax on buybacks, and some Democrats in Washington, including President Joe Biden, have suggested increasing that tax to 4%.

According to Standard & Poor’s, stock buybacks by companies in the S&P 500 are down this year. A report published Tuesday noted that “the 12-month September 2023 expenditure of $787.3 billion was down 19.8% from the $981.6 billion expenditure of September 2022” for buybacks among S&P 500 companies.

Tags: Buybacks, Insider Trading, SEC, stock buyback