China Buys 9.9% of Blackstone Group

The Communist Party of China has decided that investment in an American private equity group is a good idea. Blackstone Group, which specializes in buying up companies and then selling them off at a profit, will sell about 9.9% of its equity to a still-forming state investment agency for $3 billion. Until now, the People’s Republic of China has been content to hold low-yield instruments like US Treasuries. The move into Blackstone may make a watershed event.

The PRC has about US$1.2 trillion (US$1,200 billion for those educated in Britain prior to the election of Tony Blair or for those who read the Economist) in foreign currency assets. It keeps loads of it in cash, which does no one any good, or in sovereign debt, which doesn’t do much for fiscal responsibility in Washington nor much for Chinese economic growth in the future. Someone in Beijing finally convinced the Reds that they could make more money with their capital (how communist are these guys really?) if they got in on the private equity game.

Blackstone, of course, is over the moon about the deal. The fund specializes in fixing up screwed up companies by selling off non-performing divisions, firing workers and turning losses into profits. China is full of such beasts thanks to 60 years of communist mismanagement and private sector speculation. Access to this kind of market and the preferential treatment that goes with being partially owned by the Beijing government is going to make Blackstone richer still.

Well, so what? China gets richer, Blackstone gets richer, and who gives a damn? Unfortunately, just about everybody in the world economy should care. Robert Peston at the BBC put it quite succinctly, “Were the Chinese to divert their cash flows significantly away from US Treasuries and into private equity and other asset classes to a significant extent, the yield on Treasuries would rise and the return on these other riskier asset classes – including private equity – would continue to fall. And there would come a moment when the price of these riskier assets would be ludicrously high by comparison with the price of a low-risk, US government bond – and at that moment, the bubble would be pricked.” He added, “If the end of the era of cheap Chinese-subsidised money were nigh, there would be a global market slump in hedge funds, private equity, shares, bonds, property, commodities and precious metals which would touch almost every life on the planet.”

Now, this US$3 billion investment isn’t going to sink the world economy. But then, the Chinese government officials have a habit of wading cautiously into pools rather than diving in all at once. They have US$1.2 trillion to play with, and they will do so when they are good and ready. But they have put a toe into the private-equity waters. Eventually, they will be swimming in that pool, and it may well make waves in the rest of the world.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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