In China, a Stake in Blackstone Stirs Uncertainty

NYT In China, a Stake in Blackstone Stirs Uncertainty By KEITH BRADSHER and JOSEPH KAHN Published: May 29, 2007

HONG KONG, May 28 — From Washington, the Chinese government’s purchase of a $3 billion nonvoting stake in the Blackstone Group looks like a shrewd alliance with a politically connected American private equity fund loaded with financial expertise.

The Chinese government is acquiring nearly 10 percent of an influential investment company without a repeat of the fights that surrounded a bid two years ago by a state- owned oil company, Cnooc, for an American rival, Unocal, or last year’s effort by DP World of Dubai to assume management of American port terminals.

While Blackstone is well known in global finance, it is not a household name in the United States and the sale of the stake has attracted little attention in Congress. But in China, opinion remains divided between those who see the deal as a way to buy a big stake in an important company and those who worry that the government is leaping into deals without a clear investment strategy.

The deal could be particularly troublesome for China if Blackstone uses proceeds from the sale of the stake or its coming initial public offering to buy assets in China. That could undermine China’s effort to hold down the value of the yuan and could set off bureaucratic rivalries within the Chinese government, people close to Chinese policy makers said.

An overseas investment company is supposed to hold the Blackstone stake and also invest broadly in overseas equities and other assets. But Jesse Wang, the chairman of the Chinese government agency handling the acquisition, said in an interview that the government did not even hope to set that company up until the end of this year.

“We haven’t had the investment policy” decisions yet, Mr. Wang said.

Still, he defended the Blackstone deal as a chance to acquire a stake at a discount before an initial public offering. Blackstone has agreed that the Chinese government would receive its nonvoting units at a 4.5 percent discount to the price set in the public offering this summer.

A Chinese executive who discussed the Blackstone deal with government decision makers said that there was still considerable infighting over the goals for the new overseas investment company. Some agencies want the company to focus on acquiring high-technology businesses and others on securing Chinese access to energy and natural resources.

While a few Chinese officials have mentioned that the new company could someday resemble Singapore’s powerful state-owned investment firm, Temasek Holdings, the executive described this as “far-fetched.” The new company is unlikely to gain the bureaucratic independence to play such a role, said the executive, who asked for anonymity because of the delicate nature in China of government investment policies.

Another question hanging over the deal is whether it will actually help China push foreign exchange out of the country.

The People’s Bank of China, the central bank, has piled up $1.2 trillion in foreign exchange reserves, mainly in Treasuries and other government bonds, by intervening strongly in currency markets so as to prevent the yuan from rising against the dollar. A central reason given by Chinese officials for setting up the investment company is to improve returns on foreign currency holdings.

Mr. Wang said that improving returns was the reason for the Blackstone transaction.

But the benefits of the Blackstone investment could be considerably reduced if the equity firm starts trying to convert dollars into yuan to invest in China. Blackstone has been much slower than rivals like the Carlyle Group and TPG to invest in China, but it is now opening two offices in the country and looking for deals.

“To take money out of China and put it into an institution that brings it right back into China doesn’t make monetary sense,” a finance professor at Beijing University, Michael Pettis, said.

A Blackstone effort to acquire businesses in China could also lead to bureaucratic rivalries that would make a deal harder to complete. That is because foreign acquisitions of Chinese companies are typically vetted by various agencies with agendas that may not necessarily overlap with the goals of the new government investment company.

The deal effectively allies Blackstone with Lou Jiwei, the chairman of the working group that is setting up the overseas investment company. Mr. Lou is not seen as especially influential in the Chinese Communist Party because he spent the last nine years as a deputy finance minister, repeatedly passed over for minister-level jobs.

Mr. Lou’s new position as head of the investment company is technically a minister-level job, but there are many holding such positions who do not carry the same clout as someone who runs an actual ministry.

And at 57, Mr. Lou may be too old to take another position when he finishes at the investment company.

The Blackstone deal also represents a Chinese alliance with a pillar of the American financial services industry. The Japanese auto industry has been highly effective at building car factories in the districts of influential members of Congress and negotiating to buy auto parts from plants in the districts of other members. But the Blackstone deal may not bring comparable benefits for China. The American financial industry has already tended to be supportive of free trade and especially desirous of greater access to the Chinese market, making it a natural ally.

The toughest critics of China tend to be from manufacturing states — and the Blackstone deal may do little to mollify them.

Chu Shulong, the deputy director of the Institute of International Strategy and Development at Tsinghua University in Beijing, said that Chinese companies and the Chinese government had only begun to figure out how money influences policy in Washington. He doubted that the Blackstone deal would be used effectively for political purposes.

Japanese, South Korean and Taiwanese companies are all much more adept at influencing debates in Washington, he said, adding, “The Chinese voice is still very weak.”

Keith Bradsher reported from Hong Kong, and Joseph Kahn from Beijing.