Railpen stands by investment in Chinese government debt

According to the scheme’s 2021 annual report, it made an allocation to Chinese government bonds last year, as well as investing in Chinese equities via the asset manager Baillie Gifford.

The scheme has invested in Chinese onshore equities since 2008, it told Pensions Expert, while its private markets portfolios have also had exposure to Chinese companies “for a number of years”.

Railpen is a vocal advocate for positive investor behaviour around environmental, social and governance factors. In April it announced that it had created a new framework for net zero stewardship in partnership with the Institutional Investors Group on Climate Change. It also set out goals for engagement with companies in its 2022 voting policy last year.

Speaking to the Chinese government on these issues is not going to get you anywhere

ESG analyst

The Chinese government, however, stands accused of serious human rights abuses, notably of its Uyghur population. 

According to the Council on Foreign Relations, the Chinese government has imprisoned more than 1mn people since 2017, with those not detained subjected to surveillance, religious restrictions, forced labour and forced sterilisation. 

In 2021, the United States of America said China’s actions constituted genocide, which China has denied.

“All allocations Railpen makes across portfolios are subject to the highest level of scrutiny, both on financial metrics and approach to responsible investment,” a Railpen spokesperson told Pensions Expert.

“For all sovereign debt holdings, Railpen uses a proprietary sovereign ESG screen which highlights any risks across regions and takes a holistic approach to ESG, incorporating a wide range of considerations from human rights to net zero commitments and green technology investment.”

Engaging with the Chinese government is challenging

The Chinese government bonds holding accounts for 2 per cent of the scheme's assets, while its China ‘A Shares’ allocation represents 1.5 per cent.

‘A Shares’ were typically only available to Chinese mainland citizens and specially selected foreign investors, but have become more widely held in the west following their inclusion in MSCI's emerging markets index and the launch of the 'China Stock Connect' scheme.

“Railpen is constantly looking at ways of delivering excellent and diversified investment returns in line with the trustee's investment policy and on behalf of its members,” Railpen said. 

“Following extensive analysis through our investment, risk, and ESG analysis frameworks, we believe that in the current market climate, an allocation to domestic Chinese assets offers strong diversification benefits and attractive prospective returns within a multi-asset portfolio.”

In May, the Principles for Responsible Investment — a UN-backed investor network — made a series of recommendations to Chinese policymakers for improving stewardship. These included developing a stewardship code, joining up financial regulators "to create a common language for stewardship" and encouraging investors to maximise the influence of minority investors.

“Limited regulatory attention has been paid thus far specifically to stewardship practices” in China, the PRI admitted, adding that “within China’s existing regulatory framework, regulators are increasingly recognising the need for investors to manage ESG risks and impacts and support solutions to broader economic, social and environmental issues, including systemic ones”.

But one ESG analyst, who did not wish to be named, told Pensions Expert: “Analysts have found that you don’t actually get that much useful information from a lot of Chinese companies if you speak to them on human rights policies and approaches.” 

“Speaking to the Chinese government on these issues is not going to get you anywhere,” the analyst added.

Chinese equities are ‘too big to ignore’

At around $15tn (£12.4tn), China’s gross domestic product is nearly the size of that of the European Union, accounting for about 18 per cent of global GDP. China was the EU’s biggest trading partner in 2021, overtaking the US.

The Chinese market also has more listed companies than its US counterpart.

“With our equity holdings, we believe that investing in developing regions as responsible investors allows us to engage with companies with the aim of driving positive change over the long term,” Railpen said.

Investment consultancies attending a Camradata panel last year were asked to quantify their preferred allocations to China, with the results ranging from 5 per cent to 15 per cent.

“Chinese equities are an asset class too big for global investors to ignore,” said Mayur Nallamala, RBC Global Asset Management head of Asian equities, who added that Chinese equity “may well be the largest asset class globally that has the lowest correlation with other major global economies”. 

Nallamala admitted, however, that “ESG issues including human rights are crucial yet also challenging due to insufficient information, varying views, and the overall dynamic nature of the matter”. 

“As slow as it may feel, it’s worth noting the ongoing ESG progress in China over recent years. Environment probably saw the most progress, from renewable energy related business models to related non-financial disclosure,” he said.

“Other ESG matters like governance behaviour, management quality, accounting quality, human rights and product impact are more subtle.”

Another ESG analyst, who did not want to be named, observed that investors would always face “a compromise between expected return and the ESG characteristics” when investing in a government’s debt.

“It is obviously very difficult to buy Chinese government bonds for anybody and be able to engage [with] the government,” the analyst said, and added that away from China, investors have had greater success in engaging with governments, particularly in smaller countries.

“I have heard stories, or case studies, of global fund managers having some effect on government policies.”