Beijing's market foray is step in right direction

PUBLISHED : Tuesday, 22 May, 2007, 12:00am
UPDATED : Tuesday, 22 May, 2007, 12:00am

Set against the mainland's foreign reserves of more than US$1.2 trillion, the US$3 billion placed by Beijing with US private equity giant Blackstone Group looks pretty small beer. But the stake, confirmed over the weekend, carries wider financial and political significance.

Engineered by Hong Kong's former financial secretary Antony Leung Kam-chung, who now heads Blackstone's China business, the deal is the mainland's first foray into diversifying its escalating foreign reserves. The move confirms that Beijing wants to join the likes of Singapore and South Korea in exploiting the potential of modern markets with state assets.

While the timing of the move into the currently hot private equity market could be debated, the overall policy direction is welcome, as it helps to further cement the mainland's emergence as a modern economy. The diversification of assets traditionally held in unexciting bonds is set to accelerate once the new state investment agency is finalised. The body, announced in March, is eventually expected to manage about US$300 billion in foreign reserves.

There is more than a prudent investment strategy to the Blackstone decision. The timing is no accident, coming just ahead of the opening this week of the second meeting under the Sino-US Strategic Economic Dialogue banner.

Both Vice-Premier Wu Yi and US Treasury Secretary Henry Paulson find themselves under pressure as the talks start. Protectionist instincts, never far from the surface across the lobby-ridden US political system, are on the ascendancy in the new Democrat-dominated Congress. The vast imbalance of trade in China's favour is increasingly under the microscope and pressures are again mounting for Beijing to allow the yuan to strengthen against the US dollar.

The administration of US President George W. Bush appears to sense the pressures that any drastic appreciation of the yuan would place on Beijing, given the central government's habitual concern for social stability in a fast-growing economy.

The US Congress, however, is another matter. As we report today, Mr Paulson is facing increasing domestic pressure to produce results as some question the worth of talking to Beijing. Last Friday's triple measures - increasing interest rates, raising bank reserve requirements and broadening the yuan trading band - may be too little to dampen the mainland stock-market bubble, much less ease Sino-US economic friction.

From Beijing's perspective, a sweeping revaluation of the yuan is just not going to happen, particularly given the internal challenges ahead of the leadership changes later this year and the desire for stability ahead of next year's Olympic Games. Then there is the fact that the trade imbalance is now so vast that there is not one simple cure-all that can fix it in the short term.

Instead, Beijing should take a broader, more creative approach in wooing the US. There is plenty of room for manoeuvre over the questionable enforcement of intellectual property rights. Fresh policy initiatives and active follow-through is vital to avoid further damage to the reputation of the mainland market.

Allowing foreign firms to enter its brokerage industry is another carrot to the US that could also help the mainland's market development. The Blackstone deal is a step in the right direction in broadening China's economic relationship with the world's largest economy, but more efforts are needed.