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China to buy share stake in US private equity firm

China will invest US$3 billion in US private equity company Blackstone, the first step in a new drive to diversify its massive foreign exchange reserves, both sides said yesterday.

Blackstone and China's State Investment Company, which is managing part of the nation's US$1.2 trillion in forex reserves, signed an agreement on the deal on Sunday, said Wu Kejia, an executive with Brunswick, Blackstone's PR firm.

The deal, which comes ahead of Blackstone's planned stock market listing, is the first high-profile transaction by the State Investment Company, which is still in the throes of being established.

"It makes sense for China to outsource the management of part of its assets to an experienced global asset investment company," said Ma Jun (馬駿), a Hong Kong-based economist with Deutsche Bank. "It just needs the skills."

The transaction will give China a stake in assets such as Madame Tussaud's wax museums via Blackstone's investments in the Tussaud Group.

According to the agreement, the investment in Blackstone will be below 10 percent of total shares in Blackstone after its initial public offering, which is expected to take place in the middle of next month.

"We don't want to trigger any review or approval procedure by the US government," said Jesse Wang, chairman of the China Jianyin Investment Ltd Co (中國建銀投資), which is owned by Central Huijin, the central bank's investment arm.

Central Huijin's assets are expected to be merged into the State Investment Company, according to earlier reports.

"We are willing to remain below 10 percent so that the investment will be more simple and convenient," Wang said.

The announcement of the agreement comes just prior to the high-level Strategic Economic Dialogue in Washington, in which top Chinese and US negotiators will discuss divisive economic and trade issues.

What China buys with the purchase of the stake in Blackstone is, among other things, expertise that it currently lacks but will need if it wants to be an investment power on a global scale, according to analysts.

"It is a good starting point for the new company given the lack of human resources at this stage to manage a large portfolio," said Sun Mingchun, a Hong Kong-based economist with Lehman Brothers.

Media reports said earlier that the new foreign exchange investment agency will initially receive up to US$200 billion in foreign exchange reserves to manage, as well as a large portion of future reserves accumulation.

The State Administration of Foreign Exchange (SAFE) will continue to manage the remaining reserves of more than US$1.2 trillion -- 70 percent of which is thought to be held in US dollar-denominated assets.

The new agency is expected to invest more aggressively to increase the return on the reserves beyond the rather modest yields now earned by SAFE.

Sources have suggested that the new agency would start slowly while it refines its daily operations and so as not to roil sensitive markets.
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