The decision by the Canada Pension Plan Investment Board this month to reduce 10 per cent of its China equity team based in Hong Kong is a positive move.

It highlights a shift in the CPPIB’s approach to China, which previously saw the Canadian pension fund fend off accusations that its past investment activity in the country —  including active and passive investments — hasn’t always been in line with the pension fund’s adherence to environmental, social and governance criteria.

Read: CPPIB cuts 10% of staff in Hong Kong office: report

While speaking before a special parliamentary committee on Canada-China relations in May 2023, Michel Leduc, senior managing director and global head of public and corporate affairs at the CPPIB, confirmed investments domiciled in China amounted to 9.8 per cent of the total fund. He argued that exposing the fund to the Chinese investment market gave it “access to one of the world’s largest and fastest-growing economies in such sectors as consumer discretionary spending, logistics and real estate.”

Of course, the economic mood in China has shifted somewhat in the 10 months since the CPPIB’s bullish testimony before the committee. China’s economic growth has stalled, with analysts at Rhodium Group estimating only a 1.5 per cent gross domestic product growth last year. Official statistics show that the size of China’s population has fallen again for the second year in a row. Property investment declined by 23 per cent in December 2023 compared to the previous year, according to data from the National Bureau of Statistics.

The response from Chinese President Xi Jinping has been an unprecedented crackdown on the financial services sector and the centralization of the management and regulation of the economy under the control of the Chinese Communist Party. On top of this, the People’s Republic of China government has quietly introduced amendments to its state secrets law, which include more obligations on training for citizens to protect state secrets and forced Hong Kong to adopt the PRC’s expansive definition of state secrets as part of Article 23 security legislation.

The desired effect is to limit the flow of data and information regarding the state of China’s economy by classifying it under vague and ill-defined parameters of state secrets, criminalizing “external interference” and colluding to spread misinformation from foreign forces. Paired with the previous raiding of the offices of foreign due diligence companies — including Bain Capital, Mintz Group and Capvision — it’s clear that the risks of doing business in China have risen significantly in the last year.

Read: CPPIB laying off staff in Hong Kong as it steps back from China deals: report

Where foreign pension funds would have previously turned the other cheek when it comes to crackdowns in specific sectors of China’s economy — notably technology and the education sector — they feel unable to ignore the economic downturn taking place. The MSCI’s China index fund, as of Feb. 29, 2024, is down by nearly 14 per cent from a year ago. Morgan Stanley’s Hong Kong index fund, which the CPPIB passively tracks and invests in, is down by more than 16.5 per cent.

The response from PRC officials has been to largely ignore calls from the foreign business community to move away from the prioritization of “national security” at the expense of economic growth. Instead, they appear to favour a strategy that one China analyst charitably described to me as “a quiet economic crisis.” This approach was on display at the recent National People’s Congress conference where  Chinese Premier Li Qiang’s annual press conference, a 30-year tradition, was cancelled.

The CPPIB faces the unenviable task of mitigating rising investment risk in China with dwindling hopes of high returns for Canadian pensioners. It’s little surprise that they’ve chosen to quietly downsize their operation in Hong Kong alongside other public pension funds. The question is, are these moves temporary or part of a wider alignment for public pension funds away from China when it comes to their emerging markets investments?

Read: AIMCo opening first Asia office in Singapore, remains leery of China