Blackstone wins China fund deal

PUBLISHED : Saturday, 19 May, 2007, 12:00am
UPDATED : Saturday, 19 May, 2007, 12:00am

US equity firm given task to invest US$3b of mainland's growing foreign reserves

Beijing has appointed United States private equity firm Blackstone Group to invest US$3 billion of the country's ballooning foreign reserves, according to the semi-official China Business News.

The mandate, which was reportedly given out through Central Huijin Investment, will help the mainland government spread investment risk, improve returns and ease pressure on yuan appreciation.

The selection of a US company may send a signal that the mainland hopes to pacify Washington, which has blamed Beijing's control on the value of yuan for its growing trade deficit.

The central government in March said that it was setting up an overseas fund as a way to diversify investment of its more than US$1.2 trillion foreign exchange reserves.

People's Bank of China governor Zhou Xiaochuan earlier this month said the fund was still in the preparatory stage but would be operating in the near future.

'The belief was that the decision-making process was going to be a protracted affair so US$3 billion into one name is most certainly a coup for Blackstone and I suspect that there are a lot of disappointed people out there at other funds,' said one market observer.

Blackstone has been making a concerted effort to increase its mainland business after focusing on India since its arrival in Asia in 2005, following in the footsteps of rivals Kohlberg Kravis Roberts, Bain Capital and Carlyle Group.

The company in January hired Hong Kong's former financial secretary Antony Leung Kam-chung to run its new China office in Hong Kong and help it seek key deals in the mainland.

New York-based senior managing director Ben Jenkins is relocating to Hong Kong as well.

According to the China Business News report, the mainland's overseas fund is expected to begin operations as early as the end of this year, but the several government bodies involved in its establishment still had disagreements.

Currently, the State Administration of Foreign Exchange is in charge of investing most of the country's foreign exchange reserves. The investments usually are made in low-interest US treasury bonds and other high-quality assets.

The growing foreign exchange reserves have increased political pressure from trading partners such as the US to accelerate the appreciation of the yuan. They have also led to domestic pressure for investments in higher-yielding assets.

China needs no more than US$360 billion of foreign exchange reserves for emergency external liquidity needs, according to Credit Suisse estimates.

The reserves have grown rapidly since 2000 when they stood at just US$165.6 billion and are now the largest in the world. Their growth has accelerated due to the government's policy of gradual yuan appreciation. That requires Beijing to buy massive amounts of US dollars in the open market.

Blackstone was involved in four of the 10 largest global buyouts last year. The company's US$36 billion takeover of Equity Office Properties, a US property firm, is the largest buyout on record. It declined to comment yesterday.

Blackstone runs six types of investment vehicles including an US$18 billion private equity fund, a US$5.25 billion real estate fund, an US$8.8 billion debt fund and an US$18.4 billion fund of hedge funds.

Getting bigger

The amount of foreign reserves China has accumulated to the end of March, in US$ trillion 1.2