In an unprecedented development that highlights Beijing’s yearning to strike into the private equity boom, the Chinese government has decided to invest $3 billion of its huge foreign exchange reserves to acquire a 9.9 per cent stake in Blackstone, the US buy-out fund. The investment will be routed through the soon to be established state foreign exchange investment company, State Investment Company in China to buy stakes in Blackstone in the form of non-voting common units. However, the figure of non-voting common units acquired by the State Investment Company will be reduced if required so that the State Investment Company’s equity interest in Blackstone immediately in case the planned initial public offering remains under 10 percent.
The State Investment Company has also agreed to hold its investment in Blackstone for at least four years. In addition, the $3 billion sale of non-voting common units to State Investment Company will be consistent with Blackstone’s considered $4 billion initial public offering. The recent development underscores an abnormally forceful move to the country’s long-expected operation to broaden its horizons how it invests its gigantic $1.2 trillion foreign-exchange reserves. The pronouncement was made as US-China high level strategic economic dialogue are about to begin in Washington, led by US Treasury Secretary Henry Paulson and Chinese Vice Premier Wu Yi.
According to the terms and conditions of the deal, which reports suggest that it is believed to have been agreed in just a few weeks but in reality it might have taken much more tine as the Chinese are essentially slow moving and cautious, the Chinese government has taken the strange move of relinquish its voting rights associated with the stake in Blackstone. Moreover, the strategy seems to be aimed at placating any US political opposition to the agreement in the middle of growing uneasiness between Washington and Beijing over the currency flexibility. At the same time, the US Treasury specified that it had decided last week to permit the Chinese to invest more in foreign stocks and was working to create ‘opportunities for US financial services firms like this’. 
As a matter of fact, the Chinese government has been constantly searching for avenues to diversify its foreign exchanges reserves away from low-profit making US Treasuries. On the other hand, buying into Blackstone’s listed entity may strip off the Chinese government of some of the substantial returns secured by its buy-out funds. However, there are intense fears growing that the private equity cycle may be approaching its peak, as takeover prices and debt levels have already reached record levels this year so far.
Till recently, Chinese authorities were predominantly invested in foreign currency, particularly US Treasury bonds, which have produced a secure but fairly small return. Around 70 percent of China’s foreign currency reserves are thought to be held in secure but small-return fetching US Treasury bonds and other dollar-denominated assets. But in changing circumstances that rapidly transforming the traditional built, with the US currency in deterioration and the Chinese government willingness to be open for more risks to earn higher returns, the new agency is being constructed, in part, on Temasek Holdings, Singapore’s state-owned investment firm, which has invested billions of dollars around the world, predominantly in China.
Consequently, another parallel investment agency in China would actually create the world’s largest hedge fund. The unusually aggressive investment of approach has certainly sent shock waves to analysts and compelled them to argue that the China fund’s investment of billions of dollars in the global financial markets could push global asset prices higher, affecting the US and European stocks, bonds and interest rates, as well as the value of energy and natural resources in Africa and the Middle East.
Though the non-voting stake makes this deal a passive investment but leaving open on the question of how aggressive the new agency or investment vehicle will be in taking active stakes in Western corporate entities in the time to come. Private equity firms are increasingly looking to become a more important part of the Chinese economy as firms there are looking for experience in becoming global corporate players. Meanwhile, the Chinese government still desires to remain an economic force even as it reduces investments in US government debt.
Blackstone had speeded up its China venture efforts in January, hiring Antony Leung, the former Hong Kong Financial Secretary, to head its Asia Pacific operations with Ben Jenkins, a senior managing director who has recently moved to Hong Kong from New York.
