- The Washington Times - Sunday, May 20, 2007

NEW YORK (AP) — China has agreed to acquire a $3 billion stake in U.S. private-equity firm Blackstone Group LP in a deal that marks that country’s long-anticipated move to expand how it invests its massive foreign-exchange reserve.

The transaction calls for China’s upstart state investment company to buy nonvoting shares in the buyout company, concurrent with Blackstone’s highly anticipated initial public offering of its management division, which is expected to raise up to $4 billion. The IPO was announced earlier this year, though no date has been set for its debut on the New York Stock Exchange.

China’s stake will mark the first time that country’s government has sunk cash into a foreign private-equity firm, which makes its money buy acquiring ailing companies, turning them around, and then selling them at a profit. The Chinese government had been set to shift some of its foreign-exchange reserves of more than $1 trillion into other world currencies because of the sluggishness of the dollar.

“We hope this is an important first step in broadening the capital flows between China and the U.S.,” said Stephen Schwarzman, Blackstone’s chairman and co-founder.

Under terms of the agreement, the Chinese investment company will own no more than a 10 percent interest in New York-based Blackstone. It also agreed to hold its investment for four years, and after that can only divest $1 billion per year, a Blackstone spokesman said. The transaction also restricts China from investing in competing private-equity firms for a year.

Blackstone operates a $15.6 billion fund, and its holdings include everything from Madame Tussauds wax museums to real estate company Equity Office Properties Trust.

Blackstone said the IPO will help it tap new sources of capital for multibillion-dollar acquisitions. The deal with China will also help open the door for direct stakes in Chinese companies as that nation becomes more receptive to foreign investments.

China has been seeking alternative places to invest its large reserves. Most have been held in U.S. Treasury bonds and other government debt, but officials have said they planned to put a portion in investments with higher returns.

For U.S. financial firms, spanning from Wall Street investment banks to unregulated private-equity firms, the talks take on an even more significance. Private-equity firms are looking to become a more important part of the Chinese economy as companies there are looking for experience in becoming global corporate players.

Meanwhile, the Chinese government wants to remain an economic force even as it downscales investments in U.S. government debt.

“They will use their money to gain influence, and this is a good example of this,” said Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business. “Blackstone isn’t just a fund, it’s a very influential group in the United States. Basically, it’s the Chinese government making a significant stake in a highly influential Wall Street firm. And, in turn, that firm has an influence on U.S. policy.”

China’s reserves are growing by about $20 billion a month as surging exports bring in a flood of foreign currency. About 70 percent of China’s foreign currency reserves are believed to be held in safe but low-return U.S. Treasury bonds and other dollar-denominated assets.

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