China seeks to play down $3 billion investment in Blackstone

By Keith Bradsher

HONG KONG: A day after buying a $3 billion stake in the Blackstone Group, China sought Monday to offer assurances that it was looking only to improve its returns on overseas investments - not to take control of foreign companies, which could aggravate political tension.

The government moved quickly on the deal to make an investment before Blackstone, a U.S. private equity firm, conducted its initial public offering of shares, said Jesse Wang, the chairman of the Chinese government agency that is managing the transaction on behalf of a new state investment company, which has yet to be set up.

But the new state investment company is not currently negotiating for further large stakes in overseas companies, Wang added.

The Blackstone investment stirred memories of the unsuccessful bid two years ago by Cnooc, a Chinese state-owned oil company, to acquire Unocal, an American oil company; congressional opposition in Washington blocked that transaction.

Some in the United States have also been wary of any pattern of high-profile Chinese acquisitions that might resemble Japanese investors' acquisitions in the 1980s of landmarks like Rockefeller Center and the Pebble Beach golf course.

Wang went out of his way to try to allay those fears, saying that the new investment company would be more interested in investments paralleling funds that buy shares in most or all of the stocks in indexes that track the overall performance of overseas stock markets.

"In the future, yes, we surely think we will invest in the index funds," he said.

The Chinese government is setting up the state investment company to diversify the country's overseas investments beyond U.S. Treasury securities and other bonds. But the main goal is to accumulate a broad portfolio of small stakes in lots of companies, instead of purchasing controlling stakes in a few companies, Wang said.

The Blackstone transaction, "is an individual case - I assume the investment company will engage in portfolio investment rather than takeovers," Wang said by telephone from Beijing.

The transaction Sunday will transfer less than 10 percent of Blackstone's equity to the Chinese government, and is a nonvoting stake, Wang said.

He said that the government did not expect to play a role in managing Blackstone, and added that the government did not expect Blackstone to provide any advice in exchange for the investment.

[Blackstone said Monday that it planned to raise as much as $7.75 billion from selling stakes to the public and to China, Reuters reported from New York. The initial public offering would rank among the top 10 U.S. IPOs, according to Dealogic, and be the largest by a private equity firm. ]

Wang is the chairman of China Jianyin, an operating unit of the Central Huijin Investment, a Chinese government agency that handles a broad array of transactions between Chinese state-owned companies and foreign investors, including the sale of Chinese banks' problem loans.

Michael Smith, the chief executive of HSBC's Asian operations, said during an interview that few companies were likely to oppose the sale of minority stakes to the Chinese government.

"Too many shareholders just think for tomorrow, so in many ways they bring some stability," he said.

In the Blackstone deal, the new state investment company will acquire a nonvoting stake at a 4.5 percent discount to the public offering price to be set in Blackstone's initial public offering this year.

It is common in China for tycoons and large companies, often from Hong Kong, to take large stakes in a company before its initial public offering. Wang said that to some extent the state investment company would be following this precedent in agreeing to a deal with Blackstone even before the Chinese government has decided many details about the investment company.

"Personally, I think it may be a Chinese way" of doing business, he said.

The timing of the Blackstone deal two days before senior Chinese and American economic policy makers begin meeting in Washington was purely coincidental, Wang insisted.

"I don't think that IPO schedule is coordinated" with the China-U.S. talks, he said.

The new investment company is supposed to buy a broader array of assets than the central bank usually purchases with its foreign exchange reserves, but it is still a long way from even being established as a separate legal entity. "We hope it will be in operation before the end of this year, but I don't know," Wang said.

China's State Council, the country's top government body, will give the company its capital by putting in foreign exchange, but there has been no decision yet on how much money the company will have, Wang said. The central bank will closely advise the new company once it is created.

"When the new company is set up, it cannot possibly manage tens or even hundreds of billions of dollars" unless it receives help from other government agencies, he added.

It is unusual for Chinese officials to take questions from the media regarding overseas investments, but Wang allowed his phone number to be printed on a Blackstone news release. Answering some of the resulting phone calls was "a little scary," he said.

Holding $1.2 trillion in foreign exchange reserves, as China does, can be a curse as well as a blessing, forcing tough decisions.

Well before the investment Sunday, the managers of China's foreign exchange reserves had proven themselves unusually willing to venture beyond the U.S. Treasury securities that make up the bulk of most countries' reserves.

Whereas countries like Japan have kept as much as 90 percent of their reserves in Treasury securities, the People's Bank of China has bought at least $100 billion of U.S. mortgage-backed securities as well as large purchases of bonds denominated in euros and other currencies, people close to the purchases said.

China's enormous role in financing other countries' budget deficits is a somewhat sensitive subject within China, with occasional postings on Chinese Web sites suggesting that the money could be better spent inside the country. The state-controlled media have largely ignored the issue and the postings have tended to disappear, a clear sign that the government is not allowing open discussion of the issue.

The official Xinhua press agency waited more than 14 hours, until late Monday evening, to report the Blackstone announcement.

China has such large foreign exchange reserves because it has been buying dollars on a large scale so as to slow the rise of its currency, known as the yuan or renminbi. For most approaches to investing the reserves domestically, the government would effectively have to sell dollars and buy yuan, which would drive up the value of the yuan and defeat the purpose of accumulating the reserves in the first place.