NEW YORK/BEIJING China's new state investment agency is taking a $3 billion stake in U.S. private equity firm The Blackstone Group, a sign of Beijing's eagerness to get a higher return on its hoard of currency reserves.
The agreement gives China's government a stake in the private equity boom sweeping the world and seals a key alliance for Blackstone BG.UL at a time when foreign investors are struggling to gain support from Beijing to buy domestic assets.
China is taking a non-voting stake of just under 10 percent in Blackstone, leaving it under the radar screen from U.S. government scrutiny and providing a template for future deals.
"From what I understand it should be, or will be, part of a trend," Blackstone co-founder Stephen Schwarzman said of China's investment. "Blackstone is the first, but over time I would suspect there would be others," he told Reuters by phone.
The announcement comes just days before Chinese Vice Premier Wu Yi meets U.S. Treasury Secretary Henry Paulson in Washington to discuss sticking points in trade in the second round of the two governments' "Strategic Economic Dialogue".
The run-up to the talks has seen a flurry of deals and government measures, including Friday's move to widen the yuan's trading band, which analysts say could allow the currency to appreciate faster.
"If we are going to borrow from them, then we have to let them buy things," said William Overholt, director of the RAND Corp's Center for Asia Pacific Policy.
New York-based Blackstone, which is expanding its planned $4 billion IPO to $7 billion to accommodate the Chinese investment, is making a big push into China to catch up with rivals. It appointed Antony Leung, Hong Kong's financial secretary from 2001 to 2003, as its China chief in January.
"For both China and Blackstone, it's about enhancing access and developing deeper relationships," said Monte Brem, CEO of advisory firm Leucadia Capital Partners.
"The Chinese government wants to increase its access and role in the global private equity market; Blackstone wants to increase its access and role in China," Brem said.
Private equity firms buy companies or take controlling stakes, cut costs, restructure the businesses and sell them later for a profit. They usually borrow two-thirds of the money needed to finance their purchases, making for a high-risk, high-return investment strategy.
Beijing will get the shares in the Blackstone IPO at a 4.5 percent discount and has agreed to hold them for at least four years.
A SIGNIFICANT MOVE
China said in March it was setting up a vehicle to diversify part of its $1.2 trillion of foreign exchange reserves to improve returns on its portfolio, now mainly invested in dollar bonds.
The agency, still to be named, is headed by Lou Jiwei, a former vice finance minister, who was on hand in New York for Sunday's signing ceremony.
The new agency could manage up to $200 billion, state media reports have said. Finance Minister Jin Renqing has said one of its models would be Singapore's state-owned Temasek Holdings, which invests in a broad range of industrial and financial assets at home and abroad, including Chinese state-owned banks.
"This is a very, very significant move and it symbolizes that China believes in America," said Frank Holmes, chief executive of U.S. Global Investors Inc., which invests in Asia.
Holmes contrasted the move with the political furor that scuttled an attempt in 2005 by Chinese state-owned oil firm CNOOC (0883.HK) (CEO.N) to buy U.S. oil producer Unocal.
China plans to own just under 10 percent of Blackstone's equity after the buyout firm's IPO, which Schwarzman said could be a template for future investments because they are not subject to U.S. government scrutiny.
"To the extent that the state investment company stays below the 10 percent threshold for governmental review...and invests in securities that are liquid, which this security eventually will be, that's a very easy way for the state investment company to put large amounts of money to work with minimum to no controversy," Schwarzman said.
U.S. buyout firms have flocked to Asia, seeking deals that tap into its booming economy and burgeoning consumer market.
But large, long-time U.S. buyout players in China, including TPG Capital TPG.UL and Carlyle Group CYL.UL, have found it difficult to secure majority deals.
In March, Carlyle settled for a minority stake in China's biggest machinery maker, Xugong Group Construction Machinery Co., bowing to Beijing's concern over spreading foreign influence.
Blackstone's recent deals include the $23 billion purchase of Equity Office Properties Trust and the $17.6 billion buyout of Freescale Semiconductor. It also manages a half-dozen other investment funds, including real estate and distressed debt.