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Cow Tongues and Chinese Funds

Written By Brian Hicks

Posted May 23, 2007

Dear Reader:

My dad always makes corny jokes that elicit groans from family members and chuckles from the uninitiated. One of my favorites is, "When you eat cow tongue, are you tasting the cow or is the cow tasting you?" The China-US investment relationship presents a similar paradox.

The Shanghai market is at another record high today, but the Chinese government has just taken a multibillion-dollar stake in Blackstone, a US-based private equity firm. This further muddles the meaning of what "Chinese investment" is in 2007.

In case you didn’t know, China owns us. With 1.2 trillion greenbacks in foreign currency reserves, the government in Beijing holds colossal sway over U.S. Treasury fund stability. As I like to say, China’s favorite American import is debt.

America’s favorite Chinese import is, well, everything else . . .

While we stock Wal-Mart shelves full of Shenzhen-made Christmas trees and D.C. gift shops sell models of the Capitol made in Nanjing, China is busy building a middle class. Many of those new bourgeois and their one-child families have been part of the recent astounding run-up in the Shanghai, Shenzhen and Hong Kong stock exchanges. These are the first aggressive swings from a population that until recently had a 40% household savings rate (compared to -1% in the U.S.).

For proof, just take a look at Shanghai’s outperformance of the S&P over the past year:


Shanghai vs. S&P


And the Beijing government made clear this Monday that it will not be left out of the affair. Rather than investing in the low-yield (but generally stable) U.S. T-bills, a new Chinese state investment fund has chosen a foray into the highest-yielding asset class of the past year.

Blackstone Group LP, a privately-held buyout group with plans to list its shares publicly sometime soon, has just received a commitment of $3 billion from Beijing’s China Jianyin Investment Ltd, the government agency standing in for the embryonic state investment fund.

Not surprisingly, the deal was done with the helpful guanxi (the Chinese term for balance of favor) of Hong Kong’s former financial secretary Antony Leung Kam-chung. Leung is now the head of Blackstone Greater China, dealing with Hong Kong, Taiwan and the mainland. He knows how to navigate the bureaucracy to great effect, while spinning his British-style administrative education on the other end for western comfort.

Comfort is sorely lacking in China-US economic affairs, as uneasy "Strategic Economic Dialogue" meetings proceed this week in Washington, D.C. Treasury Secretary Hank Paulson (whose predecessor John Snow now heads up a different buyout firm, Cerberus Capital Management) is pushing Chinese Vice Premier Wu Yi for currency liberalization, a major point of contention between the two sides.

The U.S. claims there is an unfair advantage for Chinese goods sold abroad, but the Chinese say that the situation must be dealt with carefully and that "politicization . . . is unacceptable" between two nations whose fates seem so intertwined in the modern economic landscape.

The Chinese jump into Blackstone will be a non-voting role, just under 9.9% of the total IPO share float, but that is not because Beijing doesn’t want to make a bigger splash. It is clearly testing the waters, with the memory still fresh of the congressional outcry over CNOOC (China’s national offshore oil operator) and its abortive purchase of U.S. company Unocal in 2005.

China is also learning how to do the buyout business from the masters. Blackstone’s net profit doubled in Q1 2007 from the same quarter last year. And Blackstone has used favorable debt market conditions to gain leverage in the bulk of its buyouts, showing another aspect to China’s own relationship with international debt.

So, though some would call China’s Blackstone bite inconsequential at a mere 0.25% of total reserves, that 3 billion could quickly turn into 6 billion, and from there, who knows?

Following the example of Singapore’s state investment arm, Temasek Holdings, China could be managing its money like a Fortune 500 company in short order. Orbus Investor subscribers can tell you just what an impact Temasek can have on markets, as our Singapore play STATS ChipPac skyrocketed early this spring after a Temasek buyout offer.


STTS 3 month


With over a trillion dollars at its disposal, the new Chinese investment company could become a major player in international stock and debt markets just months after its incorporation. Even as soon as Blackstone lists its stock for domestic consumption, the Chinese government will reap the rewards of any appreciation in share price.

How does that tongue taste now?



Sam Hopkins

P.S. – What this all boils down to is that China as a country is now doing what you as an investor should already be doing: diversifying into international investments. The Orbus Investor premium portfolio and its 16-country range is beating the S&P handily, with a 14% year-to-date return compared to just 7% for the benchmark index. Click here to find out more!