China and Blackstone Premium

How to win friends and influence people, part one: invest $3bn in a US private equity firm’s initial public offering, surrender voting rights and agree to a one-year moratorium on rival deals. Beijing’s plans to take a 9.9 per cent stake in Blackstone, the US-based private equity group, is a political masterstroke.

Investing some of its foreign exchange reserves in a US entity addresses US fears that diversification into riskier asset classes would hurt the dollar. The timing, just ahead of this week’s strategic economic dialogue, also demonstrates a willingness to engage with the US. If, as many expect, Beijing follows the investment with (modest) liberalisation of the financial services industry, Hank Paulson, US Treasury secretary, will be able to impress both Wall Street and Washington.

Finally, as an anchor investor in one of America’s biggest private equity firms, Beijing should be assured of a warmer reception next time it goes shopping in the US. Even if Washington balks – as it did two years ago when the Chinese oil major Cnooc sought to buy Unocal – the Blackstone relationship could allow for a more palatable structuring of cross-border deals.

Do the numbers stack up? Viewed in isolation, investing in a financial sponsor’s fund – the route taken by Korea’s national pension fund – might prove more lucrative. Blackstone’s valuation looks punchy and China has agreed to a four-year lock-up. But the reality is that Beijing will be able to shrug it off even if, heaven forbid, the share price bombs. Its $3bn investment is mere pocket change: at current rates, reserves are growing by that amount every two days.

As for Blackstone and its ilk, how reassuring to know there is another pool of capital they can tap should the credit markets sour. From that perspective, Asian central banks’ $3,300bn kitty makes them the perfect investor of last resort.

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