China buys into Blackstone Group

May 21, 2007



One of the most significant economics story today is the announcement covered in the New York Times business today section that China is spending some of its 1.2 trillion dollars in foreign exchange, a chunk of which is in US treasuries which pay between 4.5 and 4.96 % interest for three months in order to acquire 8% of the non voting shares of the Blackstone Group . The acquisition will cost 3 billion dollars US. Blackstone controls companies with 375,000 employees and 83 billion dollars in sales.
The move by China to diversify its holdings thereby exposing itself to both higher rates of return but also higher risks of loss will have a major impact upon global capital flows, currency exchange values and the evolving nature of cross country ownership patterns. If China were to shift a substantial portion of its holdings from bonds to equity this would have some impact upon both the bond and equity markets

.Some of the moneys that China is now investing may flow back to China if as expected Blackstone acquires Chinese equities and firms. But, of course, China could accomplish this objective directly by simply buying Chinese equities and companies directly.

Clearly, however, the allure of Wall street and the objective of diversification is strong.

The development is another change in the increasingly complex world of globalization.