- Beijing's first foray into booming buyout market
- Investment likely to alarm protectionist politicians
Jonathan Watts in Beijing, Andrew Clark in New York
A huge shift in global capital flows is forecast after the Chinese government's acquisition of a $3bn (£1.5bn) stake in the sprawling US private equity group Blackstone, owner of Café Rouge restaurants, Madame Tussauds and Center Parcs.
The purchase, though substantial in its own right, is likely to be only the starting point of a $200bn foray into world stock markets and private companies by the communist government in Beijing.
China has the world's biggest foreign exchange reserves, worth $1.3 trillion and growing by $1m a minute. Until now, most of this has been invested in safe but low-yield US treasury bonds. With the dollar slipping in value, policymakers in Beijing are diversifying into riskier but potentially higher-return private equity.
Later this year, the new state foreign exchange investment company will take on this task, led by Lou Jiwei, a former deputy finance minister. With a war chest of about 15% of China's foreign exchange holdings, it is already being described as the biggest hedge fund in the world.
Blackstone is now well positioned to win a chunk of that money-management business. Under the deal, China will take a stake of about 8% of the US firm, which has invested in companies with 375,000 staff and a total enterprise value of $339bn.
Blackstone disclosed the investment as it set out details of its flotation on the New York Stock Exchange, which will raise up to $4.13bn. The shares, to be priced at $29 to $31, will trade under the symbol BX.
China's involvement could raise hackles in US political circles where there has been acute sensitivity about the economic role of non-western powers since Dubai Ports World's takeover of strategically important US ports last year.
However, Eli Talmor, head of the London Business School's private equity institute, said China had been careful in taking a small stake in a "non-direct" vehicle that spreads its influence relatively thinly. "This is a sign that the Chinese are coming to terms with the rest of the world - they're actually showing some restraint, some respect towards the west," he said. "If they really wanted to exercise muscle, they could go for direct investment."
The deal, he said, could ease the path for Blackstone to invest in Chinese industry.
Singapore and Abu Dhabi's state investment funds have bought Blackstone products, including shares, property and hedge funds. But China's investment could dwarf anything seen before. Stephen Schwarzman, Blackstone's co-founder, called it "a paradigm shift in global capital flows".
The deal comes just days before China and the US hold further talks in their Strategic Economic Dialogue, which was initiated by Hank Paulson, US treasury secretary, to deal with contentious issues such as trade imbalances and currency policy.
Next month, these topics are expected to be high on the agenda of the Group of Eight summit of industrialised nations.
Blackstone is the first big US private equity empire to go public. Founded in 1985, it has $88.4bn of funds under management and is valued at about $34bn - a third of Goldman Sachs's capitalisation.
In a filing with the US securities and exchange commission, Blackstone said it had 57 senior staff and 340 "other professionals". It aspires to be a "different kind of public company", taking a longer perspective than its peers. Since its establishment in 1987, Blackstone said it had delivered an annualised rate of return of 30.7%.
China has announced a series of new monetary measures aimed at cooling its red-hot economy and defusing criticism that it is a closed market that benefits unfairly from an undervalued currency.
Last Friday, the People's Bank of China raised the benchmark one-year lending rate by 0.18 percentage points and the deposit rate by 0.27 percentage points. The government also widened the yuan's trading band yesterday, which is likely to strengthen the yuan against the dollar.
External pressure is not the only driving force. Policymakers in Beijing have expressed increasing concern that a bubble may be forming in the domestic stock markets after a 50% rise in share values this year and a 130% rise last year.
The country now has 95m share-trading accounts - overtaking the number of Communist party members. Despite economic growth of 11% and corporate earnings increases of 25%, the surge in equity values is seen as excessive.
Zhou Xiaochuan, China's central bank governor, and Li Ka-shing, Asia's richest man, expressed concern last week that a bubble had formed.