- The Washington Times - Monday, May 21, 2007

BEIJING (AP) — A Chinese state fund that is buying a $3 billion stake in U.S. private equity firm Blackstone Group LP wants to avoid any political backlash when it makes other investments abroad, an official involved in the deal said yesterday.

The new fund, created to invest a portion of Beijing’s mountain of foreign reserves overseas, is expected to buy minority stakes in companies rather than pursuing outright takeovers, said Jesse Wang, chairman of government-owned Jianyin Investment Co., which represented Beijing in the deal with Blackstone.

Chinese companies have been uneasy about foreign acquisitions since the uproar in 2005 over state-owned oil company CNOOC Ltd.’s attempt to acquire U.S. oil and gas producer Unocal Corp. CNOOC dropped its bid after American critics said it might endanger energy security.

“Surely, we don’t want to [get] involved in any kind of political concerns. Maybe the fund is sizable and also people may worry that it’s from China and a state investment vehicle,” Mr. Wang said.

“Therefore, I think it will be always an issue that the new company must be very careful,” he said. “Basically, I think they are going to have mostly commercial kind of investments not involving sensitive investments.”

The Blackstone deal, announced Sunday, marked the start of China’s effort to diversify how it invests its $1.2 trillion in reserves, held now in U.S. Treasury securities and other safe but low-yielding assets.

It comes at a time of tension with Washington over China’s swelling trade surplus and unease in the United States and elsewhere over Beijing’s growing economic and diplomatic might.

Senior U.S. and Chinese officials are expected to meet in Washington this week for talks aimed at defusing trade tensions and keeping a key trading relationship on track.

Beijing announced plans for the State Investment Co. in March to improve returns on its reserves. The government has released no details of its planned size, but economists say it could be allocated as much as $200 billion to $400 billion, creating one of the world’s biggest investment funds overnight.

The company is likely to allocate money to other private equity funds or investment banks to invest in stocks and other assets worldwide, said Lan Xue, director of China research for Citigroup Inc.

“Any country that is sitting on a huge pile of financial reserves is going to start to adopt this way of managing their cash pile,” she said. “So whether the U.S. likes it or not makes little difference to whether China is going to do it or not.”

Chinese authorities say their investment company is modeled in part on Singapore’s state-owned Temasek Holdings, which invests in banks, real estate, shipping, energy and other industries in Asia and elsewhere.

For now, China has no immediate plans for more investments like the Blackstone deal, which was made early because the company is moving toward an initial public offering, Mr. Wang said.

China is buying nonvoting shares and agreed to limit its stake to no more than 10 percent of New York-based Blackstone. Mr. Wang said the Chinese fund wanted that arrangement to keep successful Blackstone managers in control.

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