WORLD - Blackstone in $3bn Chinese coup

When Blackstone announced it was to list on the NYSE, it provoked much discussion, but few mused over its potential impact on Chinese-US relations. Unsuprisingly, no one foresaw China's announcement that it will invest $3bn of its $1.2 trillion foreign exchange reserves to purchase a 9.9% stake in Blackstone. Even to Stephen Schwarzman, a man who no doubt likes to keep his finger on the global economic pulse, it was 'a suprise.' China's decision is a change of investment strategy for a nation which has previously played it safe when investing in foreign currency. For many years, the country has invested in US Treasury Bonds, incurring little risk and earning a modest return. But in March, China announced it would establish a special investment arm - the State Foreign Exchange Investment Company - to put a portion of its substantial reserves to work to earn a higher return. This announcement was part of a wider program initiated by the Chinese government, prompted by the decline in the US dollar, to look at how best to diversify its foreign exchanges away from low-yielding Treasury Bonds. The move comes at a time of increasing tension between the US and China. The US believes the renminbi is artificially low, hampering any hope of significantly reducing the trade deficit. This frustration is all the more acute because China's ownership of $350bn worth of Treasuries is financing a large portion of the $8.8 trillion federal debt. The political tension is Blackstone's gain. China's play to give up its voting rights and acquire a non-controlling stake is designed to nip any political opposition in the bud. Effectively, this agreement gives almost 10% control of the company back to Blackstone. The Chinese have also agreed not to invest in a rival private equity group for 12 months. Gaining exclusive access for 12 months to the foreign reserves of any country is nice work if you can get it. In addition, it gives the firm a foothold in a country other private equity houses have had difficulty investing in recently. All things considered, this could turn out to be one of Blackstone's best deals.