China Tests Private Equity Waters With $3 Billion Blackstone Stake

Not that we are psychic, but this week gives us the creeps. For no good rational reason really. But reason doesn’t govern all aspects of the market. Intuition, hunches, chance…these things are arguably more important to sustain a bubble market than reasonable metrics like earnings, valuations, and trends.  Frayed nerves are the sign of waning confidence. We sense a lot of nerves this week.

What’s going in the world of real numbers and real decisions? Well, China is desperately seeking for ways to relieve the inflationary pressure in its financial system. Interest rates were raised again, for the fourth time this year. And another important step was taken to get some of the hot money out of China’s banking system (and stock market) and into real, higher-yielding tangible assets (assets that are NOT U.S. Treasury bonds or notes.)

Specifically, China’s newly formed state investment agency is going to “invest” USD$3 billion in pirate equity outfit Blackstone. “The decision suggests China is testing the waters for a much bigger investment in private equity. It could open the floodgates to a tide of money flowing into the sector just as regulators are becoming concerned it may be overheating,” says Martin Arnold in the Financial Times.

China’s forex reserves of USD$1.2 trillion remind us of the red tide algal blooms we’ve seen on the Discovery Channel. In nature, the red tide is a “bloom” of algale in an estuary or coastal area that, for reasons that exceed our understanding of biology, kill off or make poisonous for human consumption other local organisms.

In financial markets it’s simpler. The red tide of Chinese forex reserves threatens to drown China’s banking system unless it can be re-directed to other foreign assets. “They are really up against a wall, trying to find ways to release the pressure and make (better) use of their foreign exchange reserves,” says Diana Choyleva, an economist at Lombard Street Research.

China, while it gives USD$3 billion to Blackstone, has also committed USD$24.3 billion to African infrastructure. William Wallis of the FT calls this China’s effort to buy an African ’empire.”

Maybe he’s right. But China is not seeking an empire of prestige. It’s seeking an empire of dirt, the kind of dirt that has metals and minerals to power China’s economy for the next 100 years. China would rather own tangible assets that have an entire continent in thrall to its bankers (the way European and American banks have approached aid to Latin America and Africa.) Is China’s strategy any more sensible?

Meanwhile, what will the Blackstone group do with an extra three billion dollars? Will it find some beaten-down, overlooked investment that everyone else in the world has missed? Telstra? Qantas? Coles?

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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