China Dabbles in Private Equity With $3B Stake in Blackstone

The People’s Bank of the People’s Republic of China recently told the Chinese people that thenceforth it wouldn’t be quite so free and easy with The People’s money. Having previously told the people that it was glorious to get rich, they might have warned the people that getting rich without working is not always as easy as it looks. But they let the opportunity pass without mentioning it.

The Middle Kingdom is an old place. But it is fairly new to the ways of modern market capitalism. In fact, the ways of modern market capitalism, circa 2007, are new to us all. No man alive has ever seen quite this level of happy delirium.

Still, the Chinese – who have never seen a market crash up close… or even a real bear market… or an economic depression that wasn’t caused by their own politicians – are especially guileless… and easy marks. The whole country bustles with the hope of easy money. Widows and orphans line up at brokerage accounts to open day-trading accounts – 300,000 new accounts are opened every day. Though Shanghai stocks are up 180% in the last 19 months and the CSI 300 is up 88% this year, they’re still buying. Trading volume was recently clocked at 10 times the rate of six months ago. And Mr. Hua, quoted above, expects nearly 50% gains per year from his stock account!

When the announcement of tighter bank reserve requirements came out, the people greeted it with alarm. Chinese stocks sold off. Then, a few days later, investors recovered from their brush with sanity and bid up stocks to a new record high. Asia’s richest and shrewdest investor Li Ka-shing concludes: “[this] must be a bubble.”

“We have actually now bubbles everywhere,” Marc Faber, who oversees $300 million in assets at Marc Faber Ltd., told Bloomberg News in Zurich on May 21. “We have bubbles in real estate, in equities, in bonds, in commodities, in art prices and totally useless collectibles. So, this bubble is huge and includes just about any asset in the world.”

High and low, Chinese and foreign devil, Ashkenazim and goyim…everyone now expects to get into heaven without ever dying…and to be the one sucker in history to get a better-than-even break.

Let The People have their illusions. The Chinese leadership has a folly of its own. China is buying a giant piece of a giant bubble, shares in the private equity giant, Blackstone.

Blackstone is in the business of making deals, and clearly has the wind at its back. The lenders from whom it borrows, and the public from whom it buys and to whom it sells, act more like patsies than counterparties. Japan and Switzerland lend at almost zero interest. And then investors, from whom Blackstone presumably bought an asset at a bargain price, take it back, after Blackstone has worked its magic, at top dollar.

And the deals are coming fast and furious. In the United States, new securities issues increased 13% in the first quarter – led by mergers and acquisitions, which were up 23.6% from the same period the year before. Total equity underwriting rose 42.6% over the first quarter of 2006.

And now, here comes the investor with the largest cash pile in the entire world – China – into the private equity market.

And here we pause to draw breath. We have before us a group of unreformed Marxists buying shares in what must be capitalism’s most capitalistic institution. “What does it mean?” we are tempted to ask. We don’t know, but we think we hear the deep laugh of the gods, who appreciate irony more than slapstick.

“The capitalists will sell us the rope we use to hang them,” predicted Lenin. But it isn’t that simple. Instead, the Chinese sold the rest of the world – particularly Americans – glass thingamajigs and plastic gew-gaws, taking America’s paper money in exchange. Now, the government of Mao and Zhou and Deng has about $1 trillion on hand. What can it do with that kind of pile? Forget flea markets and holiday sales. This is enough to buy a controlling interest in all 30 of the Dow Jones Industrials. A little over ten years ago, it would have bought the entire Dow, lock, stock and barrel, with change left over.

The Chinese are not dopes. They’ve had their long spell of political madness. They’ve turned their interest to money and now they’re going a little mad there too. So, they are not buying rope…but assets. The communists won’t hang the capitalists at all. They will merely replace them, becoming rentiers themselves, by giving back their dollars in payment for America’s remaining factories, brands, resources, and companies. And then, maybe the new owners will let us shine their shoes and do their laundry.

But even more interesting than the practical effects of this move is the theory behind it. Democracy, Communism, and Modern Portfolio Theory all rest on the same claptrap – that The People are geniuses and saints. All the theories agree – there is no higher source of wisdom, virtue, or pricing than the will of the heaving masses. If the voters want to do something foolish, who can tell them not to? And if stock buyers put a price of $40 on Blackstone shares, no other price really counts.

What is remarkable is that every punter knows it’s not true. Every one of them tries to make money by taking advantage of the masses’ imbecilities. An investor buys a stock like he takes a homely mistress, believing he sees something in her that the rest have missed. Every bet he makes says: “I’m smarter than the whole lot of you.”

Blackstone’s business, too, rests on the presumption that The People have erred. The company pretends to ‘add value’ by finding a company that the people have mispriced. Blackstone buys it, then reorganizes it, borrows against it, and pays itself millions in fees. After this shake up, when the company finally comes to rest in the peoples’ own brokerage accounts again, it is presumed to be a more valuable enterprise.

But is there any asset or investor left on this whole planet that has not already been shaken up…and now trembles with money lust? Is there a single fragile leaf left anywhere on this sorry ball that does not flutter in the hopes of turning to gold?

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Bill Bonner

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