Last week China revealed plans to allow more money to be invested in overseas markets, starting with Hong Kong.
An existing investment scheme’s rules would be eased to allow Chinese banks greater discretion in making these investments: no longer would the investments be limited to fixed interested securities, such as US treasury securities.
Shares with a rating of BBB or better could be bought, but no more than five per cent. More speculative investments such as commodities and hedge funds and private equity were still barred.
Now the Chinese Government has started its long awaited diversification out of US dollar denominated securities, such as treasury notes and bonds and into US private equity funds.
The news of the deal with the huge Blackstone group will both cheer Wall Street and send a chill through US political ranks and the boardrooms of companies around the world.
London reports in the Financial Times and other international papers say that China has agreed to invest $US3 billion of its huge foreign exchange reserve pool of more than $1.2 trillion with the Blackstone private equity group.
It is obviously a testing of the waters but it could very well be a precursor to a much larger flow of investments in these funds around the world as China looks to recycle its huge reserves and obtain better returns.
It will however heighten concerns that the prospect of Chinese investments will drive the already hot private equity sector higher, and put a speculative rocket under the share prices of possible targets (such as Qantas, Coles, Orica and the like here) if this turns into a cascade of billions.
China is in the process of allocating up to $200 billion to a special fund to try and get higher returns. The money involved in the Blackstone deal seems to be part of that.
It is not the first time official reserves have been invested this way: South Korea does it and the Norwegian State owned investment fund (worth well over $US360 billion) is another big investor in a wide spread of market and unlisted deals.
But there are other benefits. On top of the moves announced late Friday to free up the movement of the Yuan, lift interest rates and official reserve deposit ratios for banks, the investment in the Blackstone investment funds will add to the impression, ahead of those high level talks this week between the US and Chinese Governments, that China is taking steps to free up its exchange rate and slow the economy.
But the Blackstone deal has another, much subtler bonus.
By investing in the latest darlings, the private equity funds, which are making money for investors, their brokers, their shareholders and some very big and well connected politicians, China has enlisted the one group in the US whom the American Government takes heed of: Wall Street.
These funds managers, investors and others are big donors and supporters of politicians. The US Treasury secretary Henry Paulson is a former head of Goldman Sachs.
His predecessor, John Corzine was a US Senator and is now the Governor of New Jersey while the chairman of the Cerberus fund, John Snow, was the former CEO of Alcoa and a former US Treasury Secretary.
And there’s a President poll and Congressional elections ayear from this November with well over a billion US dollars being needed; hence the importance of all the new rich private equity, hedge fund dealers and operators, plus the investment bankers and brokers on Wall Street.
With that investment in the Blackstone funds China has circumvented all the political pressure of Washington and enlisted the driving force of the current market boom around the world and the one group politicians take heed of: Big Money (for want of a better term).
That’s clever, exceedingly smart.
By holding out the prospect of more to come and the other prospect of no more to be invested if the recent strident criticism from Washington continues (especially from Democrats on the left and Republicans from the Midwest and the right) China has now bought a big supporter in the American heartland.
