CHINA: Beijing buys into US private equity firm
Updated
China is warning the United States not to politicise trade disagreements as representatives of the two countries meet in Washington. The US Congress is threatening retaliation against what it says is China's policy of keeping its currency artificially low, to give Chinese exporters advantage over their American competitors. The top level talks in Washington this week are coinciding with moves by Beijing's new investment fund to buy a three billion dollar stake in America's second largest private equity firm, the Blackstone Group.
Presenter: Karon Snowdon
Speakers: Blackstone's CEO, Steve Schwarzman; Alec Young, Standard and Poor's Equity Analyst in New York; James Malcolm, Asian currency strategist for Deustche Bank, in Singapore
SNOWDON: The Chinese government's move to buy ten per cent of Blackstone is timely and significant.
Blackstone's CEO, Steve Schwarzman.
SCHWARZMAN: This is very important on a global basis in terms of changing the capital flows, the biggest source of reserve capital in the world.
SNOWDON: It's the first major deal for the new state investment agency set up to soak up some of China's massive foreign exchange reserves, which now amount to more than one trillion US dollars.
Alec Young, Standard and Poor's Equity Analyst in New York says no-one should be surprised.
YOUNG: China increasingly has a greater and greater proportion of world foreign exchange reserves in their coffers. Now historically they've invested these billions and billions of dollars in US treasuries, but they're looking to get a little bit more aggressive with a small portion of the money trying to increase the return that they earn in investment return that they earn on all their foreign exchange reserves. Then today they put some meat on the bones so to speak, so we weren't surprised by the news.
SNOWDON: The Chinese foreign investment fund will end up investing hundreds of billions of dollars offshore.
But the stake in Blackstone is designed in such a way and is small enough to avoid a repeat of the political backlash which ended the attempt by the state owned oil company to takeover the US oil and gas producer Unocal a couple of years ago.
And that will be welcome in the official talks now underway between China's Vice Premier Wu Yi and the US Treasury secretary Hank Paulson.
The twice yearly meetings are valued as a means of keeping a dialogue open but are not likely to result in any big announcement.
As expected Beijing did widen the daily trading range of its currency the yuan last week as a sign of good will ahead of the Washington get-together.
James Malcolm, Asian currency strategist for Deustche Bank says it's not enough to appease the US.
MALCOLM: I don't think so, I mean I think they're likely to continue with the current pace, which is more or less four to five per cent a year. But I think in terms of material progress, which are what the Americans are looking for, are likely to come up short again.
SNOWDON: Is this strategic dialogue really worth it?
MALCOLM: Well it's dialogue so insofar as talking helps to understand where each side is coming from then yes it is useful in terms of setting out positions and explaining where each side is coming from. Does it have much in the way of actual leverage over China at the policy making level? I think that's quite unlikely. But I do think that there's a little bit of wiggle room on the edge here in terms of China talking about widening the band. Those did seem to come out from a very high level on the political side in China, it didn't seem to be at the kind of working level. But will this help move us to kind of ten per cent a year appreciation of the Chinese yuan? I think that's very, very unlikely.
SNOWDON: And in a sense I suppose one other management prong is this new investment fund, which it's using at the moment to land three billion dollars into the Blackstone private equity group in the US. That's certainly a sign of things to come isn't it?
MALCOLM: It's just the tip of the iceberg, and initially they're looking to put something between two and four hundred billion dollars offshore. But this is not just China, China's really going to be setting the benchmark for all of the other central banks in Asia. But it does look like we're still facing this kind of wall of money over the next few years that will be flowing into slightly riskier assets looking for a higher rate of return.
