U.S-CHINA COMMISSION PUBLIC HEARING
DECEMBER 6, 2001
CHINA’S CAPITAL REQUIREMENTS AND U.S. CAPITAL MARKETS
Submitted By:
Steven R. Nickol
Pennsylvania State Representative
THE LAST SEVERAL WEEKS HAVE BEEN AMONG THE MORE DIFFICULT FOR ME AS A LEGISLATIVE
MEMBER ON THE BOARD OF THE PA PUBLIC SCHOOL EMPLOYEES’ RETIREMENT FUND
(PSERS). WITH LITTLE WARNING, I SUDDENLY FOUND MYSELF IN THE CROSSHAIRS OF FELLOW
LEGISLATORS SEARCHING FOR SOME WAY TO JOIN IN THE WAR AGAINST TERRORISM.
PUBLIC OPINION POLLING HAS MOVED TERRORISM AND PUBLIC SAFETY TO THE TOP OF MOST
VOTERS’ LIST OF CONCERNS. SO, IT CORRESPONDINGLY MOVED QUICKLY TO THE TOP
OF THE LIST FOR
THE LEADERSHIP OF THE PA HOUSE OF REPRESENTATIVES. THEY DECIDED TO HOLD “TERRORISM
WEEK”, AND AMONG THE MEASURES INTRODUCED WERE TWO HASTILY DRAFTED PROPOSALS
TO FORCE PA’S STATE PENSION FUNDS – PSERS AND SERS (THE STATE EMPLOYEES’
RETIREMENT SYSTEM) – TO DIVEST OF ALL assets IN COMPANIES DOING BUSINESS
IN OR WITH THE 7 COUNTRIES THAT THE U.S. STATE DEPARTMENT LISTS AS SPONSORS
OF TERRORISM.
THERE ARE VARYING LEVELS OF SANCTIONS INVOLVING TRADE WITH THESE COUNTRIES,
RANGING FROM VERY STRONG AGAINST IRAQ TO FEW IF ANY AGAINST SYRIA. AND EVEN
WHERE SANCTIONS ARE STRONG, EXCEPTIONS ARE GRANTED.
THE LEGISLATION WOULD HAVE ESTABLISHED A “GO IT ALONE” PENNSYLVANIA
FOREIGN POLICY. IN THE NAME OF FIGHTING TERRORISM, PSERS WOULD HAVE HAD TO DIVEST
OF HOLDINGS IN MANY MAJOR U.S. AND FOREIGN COMPANIES OPERATING IN FULL COMPLIANCE
WITH FEDERAL LAW. INDEED, WHOLE MARKET SECTORS LIKE PHARMACEUTICALS WOULD BE
WIPED OFF THE BOOKS OF OUR PENSION FUNDS.
WHEN I FIRST SHARED THESE CONCERNS, MY FELLOW LEGISLATORS TOOK TURNS HAMMERING
ME AS BEING SOFT ON TERRORISM.
ONE MEMBER ACTUALLY QUOTED FORMER SOVIET LEADER KHRUSCHEV AS TO CAPITALISTS
BEING WILLING TO SELL THE ROPE TO HANG THEMSELVES, AND LATER SUGGESTED THAT
I WAS A COMMUNIST FOR BEING THE ONLY COMMITTEE MEMBER TO VOTE “NO”
ON THE LEGISLATION. ALTHOUGH I MAY HAVE BEEN INCORRECTLY DISPARAGED AS THE COMMUNIST
IN THAT COMPARISON, I THINK YOU GET THE POINT AS TO THE PASSIONS OF THE DAY.
BY THE END OF THE WEEK, WE WERE ABLE TO GET A FISCAL NOTE SHOWING:
PSERS WOULD HAVE TO DIVEST OF AN ESTIMATED $3.4 B IN HOLDINGS, OR 7.84% OF TOTAL
FUND assets. THE NEGATIVE IMPACT ON FUND PERFORMANCE WAS ESTIMATED IN THE RANGE
OF –41 TO –72 BASIS POINTS, REDUCING THE PROJECTED RATE OF RETURN
AND GENERATING AN ANNUAL INCREASE IN EMPLOYER CONTRIBUTIONS ESTIMATED IN THE
RANGE OF $471.5 - $810 M.
SOON, THE HOUSE LEADERSHIP HAD ME WORKING ON AMENDMENTS TO TAME THE IMPACT OF
THESE BILLS. THEY NOW ONLY REQUIRE OUR STATE PENSION FUNDS TO DIVEST OF assets
IN COMPANIES SPECIFICALLY LISTED BY THE FEDERAL GOVERNMENT AS VIOLATING SANCTIONS
– THIS WILL HAVE A DEMINIMUS IMPACT ON OUR STATE PENSION FUNDS.
INVESTMENTS IN CHINA WERE NOT DIRECTLY AT STAKE, BUT I BELIEVE THERE ARE SOME
RELAVENT LESSONS.
INTERNATIONAL PENSION HOLDINGS
PSERS HAS ALLOCATED 62% OF OUR CORE assets TO EQUITIES, INCLUDING 20% TO NON-U.S.
EQUITY.
OUR FIXED INCOME ALLOCATION IS 25%, INCLUDING A SPECIAL 5% GLOBAL FIXED INCOME
ALLOCATION. AND, THERE IS ALSO INTERNATIONAL EXPOSURE IN REAL ESTATE AND PRIVATE
EQUITY, BUT NOT SIGNIFICANT AS A PERCENTAGE OF TOTAL FUND assets.
THE MARKET VALUE OF PSERS NON-U.S. EQUITY assets IS ABOUT $7 B AND GLOBAL FIXED
INCOME $2.3 B.
IN ADDITION, WE HAVE 5 GLOBAL ASSET ALLOCATION MANAGERS, EACH WITH ABOUT $1
B, WHO ARE ABLE TO MOVE MONEY OUTSIDE OUR CORE ALLOCATIONS BETWEEN ASSET CATEGORIES
BOTH DOMESTIC AND FOREIGN.
PSERS’ TOTAL CHINA EXPOSURE IS ABOUT $257 M, OR A LITTLE MORE THAN ONE-HALF
OF ONE PERCENT OF OUR TOTAL $45.4 B IN INVESTMENTS.
OUR SISTER FUND, SERS, IS ABOUT HALF THE SIZE OF PSERS. IT HAS PROPORTIONATELY
GREATER EXPOSURE TO CHINA WITH $284 M IN HOLDINGS, OR A LITTLE MORE THAN ONE
PERCENT OF THE TOTAL FUND.
NON-FINANCIAL INVESTMENT CRITERIA
DESPITE MY EARLIER STORY ON TERRORIST-RELATED INVESTMENTS, PA HAS GENERALLY
RESISTED USING NON-FINANCIAL CRITERIA FOR INVESTING.
THERE HAVE BEEN A FEW EXCEPTIONS:
WE ARE REQUIRED BY LAW TO FOLLOW THE McBRIDE PRINCIPLES IN INVESTING IN COMPANIES
DOING BUSINESS IN NORTHERN IRELAND.
AT THE BOARD LEVEL, SERS HAS STEADFASTLY AVOIDED APPLYING NON-FINANCIAL CRITERIA.
PSERS, MEANWHILE, DID ADOPT RESTRICTIONS ON INVESTMENTS IN SOUTH AFRICA AND
FROZE NEW TOBACCO-RELATED INVESTMENTS.
OBSERVATIONS
ALLOW ME TO SHARE SEVERAL OBSERVATIONS:
1) THE CITIZENS OF THE COMMONWEALTH OF PA, THE MEMBERS OF THE PA GENERAL ASSEMBLY,
AND THE TRUSTEES OF OUR TWO STATE PENSION FUNDS ARE ALL WILLING TO COORDINATE
OUR PENSION FUND INVESTMENT PRACTICES TO REFLECT NATIONAL SECURITY CONCERNS,
ESPECIALLY FOLLOWING SEPTEMBER 11TH.
2) NEITHER THE PA GENERAL ASSEMBLY, NOR THE STATE PENSION BOARDS, HAVE THE ABILITY
ON THEIR OWN TO DETERMINE WHAT INVESTMENTS ARE OF NATIONAL SECURITY CONCERN.
THIS IS ESPECIALLY THE CASE WHEN SOME COUNTRIES ARE ONE DAY OUR ENEMY, AND THE
NEXT DAY COOPERATING WITH U.S. INTERESTS IN A PLACE LIKE AFGHANISTAN. INDIVIDUAL
STATES AND PENSION BOARDS TAKING UNILATERAL ACTION COULD, DESPITE THE BEST OF
INTENTIONS, ACTUALLY DO HARM TO U.S. INTERESTS.
MOST INTERNATIONAL INVESTMENTS ARE MADE THROUGH MONEY MANAGERS, AND THE PENSION
BOARDS THEMSELVES ARE NOT FAMILIAR WITH THE INDIVIDUAL COMPANIES, LET ALONE
ANY UNDISCLOSED AFFILIATED INTERESTS.
PENSION FUNDS CANNOT AND SHOULD NOT BE EXPECTED TO SET FOREIGN POLICY.
3) CONCERTED ACTION BY PUBLIC PENSION FUNDS, AND OTHER GOVERNMENT-RELATED OR
CONTROLLED INVESTMENTS, COULD BE USEFUL TOOLS IN PUTTING PRESSURE ON DOMESTIC
AND INTERNATIONAL COMPANIES AND THE COUNTRIES IN WHICH THEY DO BUSINESS.
HOWEVER, THE FEDERAL GOVERNMENT WOULD NEED TO TAKE THE LEAD IN IDENTIFYING INVESTMENTS
WE SHOULD AVOID.
INVESTMENTS IN CHINA
CHINA IS THE MOST POPULOUS NATION ON THE FACE OF THIS EARTH, RICH IN NATURAL
RESOURCES AND HUMAN TALENT. ITS DEVELOPMENT OPENS THE POSSIBITY OF EARNING TREMENDOUS
INVESTMENT RETURNS THAT COULD ACCRUE TO THE BENEFIT OF MEMBERS OF OUR RETIREMENT
SYSTEMS AND TAXPAYERS ALIKE.
THE VAST MAJORITY OF PSERS’ INVESTMENT IN CHINA IS MADE THROUGH HONG KONG
- ONLY $18.4 M OF THE $257 M WE HAVE INVESTED IN CHINA DIDN’T GO THROUGH
HONG KONG. THIS IS BECAUSE HONG KONG OFFERS A SOPHISTICATED EXCHANGE, RULE OF
LAW AND A TRANSPARENT LEGAL SYSTEM. IF SIMILAR STANDARDS ARE ADOPTED IN THE
REST OF CHINA, IT WOULD OPEN CHINA TO HIGHER LEVELS OF INVESTMENT.
DESPITE THE GREAT POTENTIAL, A NUMBER OF BOARD MEMBERS REMAIN CONCERNED ABOUT
THE POLITICAL RISK OF INVESTING IN CHINA.
THE CHINESE GOVERNMENT REPORTEDLY PROVIDES MILITARY AID AND SUPPORT TO OUR ENEMIES.
THIS PROVIDES A SECURITY THREAT TO OUR NATION, AND A POLITICAL RISK TO ANY PENSION
FUND THAT INVESTS IN CHINA.
ONE MISSTEP BY CHINA IN AIDING THE WRONG ENEMIES, WITH A HIGH-PROFILE OUTCOME
WHERE AMERICANS ARE KILLED, AND THE PUBLIC PRESSURE WOULD COME FOR FUNDS LIKE
OURS TO DROP OUR INVESTMENTS.
THIS OVERHANGING UNCERTAINTY IN RELATIONS WITH CHINA DOES CAUSE SOME BOARD MEMBERS
TO ASK INTERNATIONAL MONEY MANAGERS ABOUT EXPOSURE TO CHINA. CONCERN IS EVIDENT,
ALTHOUGH I CAN’T RECALL ANYONE YET REJECTED ON THIS POINT. BUT, I DO PERCEIVE
THERE ARE UNSPOKEN LIMITS BY MANY BOARD MEMBERS – WE JUST HAVEN’T
REACHED THEM YET.
WE WANT TO INVEST IN CHINA. WE JUST DON’T WANT TO FIND OURSELVES HANGING
WITH THE CONSEQUENCES IF SOME NATIONAL SECURITY CRISIS IMPACTS NEGATIVELY ON
OUR FUND’S PERFORMANCE.
THANK YOU FOR ALLOWING ME TO SHARE MY VIEWS.