China preparing to trade U.S. bonds for equities in a big way

China to Take $3 Billion Gamble on Blackstone

By Martin Arnold, Richard McGregor,
Francesco Guerrera, and Joanna Chung
Financial Times, London
Friday, May 18, 2007

http://www.ft.com/cms/s/40240410-056d-11dc-b151-000b5df10621.html

China has agreed to place $3 billion of its massive foreign exchange reserves with Blackstone, the US-based private equity group, signalling that Beijing is starting to switch investments from US treasuries into more risky equity holdings.

The decision suggests that China is testing the water for a much bigger investment in private equity. It could open the floodgates to a tide of money flowing into the sector at the precise moment regulators are becoming concerned it may be overheating.

The placement would come from a state investment agency founded last month to manage part of China's $1,200 billion-plus foreign reserves, part of plans for a more active management policy.

Granting a $3 billion mandate to Blackstone suggests a more aggressive approach to management of the reserves, and a sense of urgency.

Blackstone declined to comment on Friday.

Private equity has been one of the best-performing asset classes in recent years, attracting record investments. But the industry's increasingly prominent role in the economy and its ownership of companies employing tens of thousands has drawn scrutiny from politicians, regulators, unions, and the media.

Stephen Jen, strategist at Morgan Stanley, said China's decision "clearly signifies a willingness to take risk."

Economists perceived the news as China's response to pressure to raise the value of its currency against the dollar before next month's G8 summit, where the renminbi's level is set to be discussed. China has announced some monetary tightening measures, to include an interest rate rise and widening of the daily trading band with the dollar.

"They are really up against a wall, trying to find ways to release the pressure and make [better] use of their foreign exchange reserves," said Diana Choyleva, economist at Lombard Street Research.

For Blackstone, which has filed for an initial public offering, China's action is a coup. A big investor in Blackstone told the Financial Times that a rush of funds from China could cause private equity returns to suffer as they focused more on asset gathering than on performance of their assets.

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