Marriage of a Communist and Capitalist (China to buy 9.9% stake in Blackstone group)

As China has announced to but a 9.9% stake for $3 bn in Blackstone group, there are mix reactions from politicians and economists. Blackstone is the second largest private equity firm in the world and arguably private equity firms are known to be the most capitalist entities whereas China is known for its communist policies and sentiments. One of the most striking and least acknowledged facts is that China has given up the voting rights for its stake and it will keep the stake for a minimum period of 4 years.

The explanation given by China for this “investment” is that it wanted to get better returns on its foreign reserve investments (China’s foreign reserves is $1.2 trillion app.). Currently China invests a large chunk of its reserves in low yielding US treasuries and a private equity firm may give better returns. There is a potential danger looming on US economy; if China stops investing in US treasuries then it will directly affect the liquidity in US economy and interest rates may go up. However China will also have to compromise large returns earned by its buy-out funds in short term by such investments.

Whatever is the reason quoted by the Chinese leaders; this action has raised suspicions that probably China is exploring a new method to strengthen its hold on world economy. The other possibilities can be
1. Signaling private equity firms that China is receptive to this form of liquidity; given the low investments by private equity firms in China as compared to countries like India
2. Signaling the domestic companies that the government will favor private equity in future and they should try to raise the capital
3. Though China has no voting rights at the moment but it will definitely vie for the same in future. If, after getting the voting rights, it starts funding for specific countries and specific projects then it will be a very audacious attempt to gain political mileage. Imagine that a big private equity firm, funded mainly by China, investing in an oil field in Nigeria. This will be a virtual sell-out to China.

The future cannot be predicted but certainly this deal has shown that China is not averse to give up its age-old ideology in its conquest to clutch the world economy.