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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (7868)	5/20/2007 5:54:11 PM
From: John Pitera	Read Replies (3) \| Respond to of 33421

Beijing to buy stake in Blackstone By Francesco Guerrera in New York Published: May 20 2007 19:22 \| Last updated: May 20 2007 19:22 The Chinese government is to use $3bn of its vast foreign exchange reserves to buy a 9.9 per cent stake in Blackstone, the US buy-out fund, in an unprecedented move that underlines Beijing’s desire to tap into the private equity boom. The investment will coincide with Blackstone’s landmark $40bn stock market listing, expected in the next few months, and will allow the private equity group to nearly double its original target of raising $4bn. Stephen Schwarzman, Blackstone’s chief executive, hailed the deal – the first time Beijing has invested its foreign reserve in a commercial transaction – as an “historic event that changes the paradigm in global capital flows”. Under the terms of the deal, which is believed to have been agreed in just a few weeks, the Chinese government has taken the unusual step of giving up its voting rights associated with the stake in Blackstone. The move appears aimed at defusing any US political opposition to the deal at a time of tension between Washington and Beijing over the renminbi. The investment – announced on Sunday – will come through a new Chinese agency charged with managing part of the country’s $1,200bn in foreign reserves. The price of the stake to be sold to Beijing will be at a slight discount to the one paid by investors in the initial public offering. Beijing has also agreed to keep the stake for at least four years. It is understood that China’s foreign reserve agency has agreed not to invest in rival private equity groups for 12 months. A number of Blackstone’s rivals, including Kohlberg Kravis Roberts, Texas Pacific Group and Apollo are exploring listings or private placings. China’s decision to buy a stake in Blackstone’s IPO rather than in one of its buy-out funds, which are more volatile and risky, is a sign of Beijing’s cautious approach to private equity. The Chinese government has been looking to diversify its foreign exchanges reserves away from low-yielding US Treasuries. However, buying into Blackstone’s listed entity may deprive the Chinese government of some of the large returns earned by its buy-out funds. In its prospectus, Blackstone warned that its priority was to return cash to the private investors in its funds, rather than to pay dividends to shareholders. Over the past two years, private equity has been one of the best performing asset classes, as private equity funds have exploited favourable debt market conditions to buy ever-larger companies. However, there are *growing fears the private equity cycle may be nearing its peak*, as takeover prices and debt levels reach record levels ------------- the WSJ take --- China to Take Stake in Blackstone By KATE LINEBAUGH in Hong Kong and ANDREW BATSON in Beijing May 20, 2007 12:38 p.m. China has agreed to take a $3 billion stake in U.S. private-equity giant Blackstone Group, which marks an unusually aggressive start to the country's long-anticipated campaign to diversify how it invests massive foreign-exchange reserves. Under the terms of the deal, a soon-to-be-established state foreign-exchange investment company will buy nonvoting shares in Blackstone, according to a joint press release. The move comes as private-equity firms have faced problems ramping up their own investments in China. The state investment company agreed not to sell the shares for four years. According to a person briefed on the deal, the investment company also agreed not to invest in a competing private-equity firm for one year. At the end of the four-year lock-up period, the company may begin selling one-third of its shares a year. The deal is expected to be completed alongside Blackstone's announced $4 billion initial public offering. For these nonvoting shares, the Chinese investment company will pay 95.5% of the public-offering price. The State Investment Company's stake will be kept below 10%, the statement said. Blackstone and other private-equity firms are going public to tap a source of permanent capital, which unlike money raised for specific funds, doesn't have to be returned. Investing at the management-company level -- rather than just giving Blackstone money to manage -- appealed to China as a way of benefiting from the plethora of fees Blackstone takes from its investments, another person familiar with deal said. China's venture into private equity would be a bold first step as the country seeks alternative investments for its $1.2 trillion in foreign-exchange reserves, which are the world's largest. Most of the country's reserves, which support China's currency and the domestic banking system, have long been held in safe but low-return U.S Treasury bonds and other government debt. But early this year, Chinese officials said they would begin investing a portion of the reserves more aggressively, in hopes of earning higher returns, and they are setting up a new government company to handle those funds. That company, which is being modeled on similar entities in countries such as South Korea and Singapore, hasn't yet been established, but it will report directly to the State Council, China's cabinet. How exactly to adjust the investment strategy for the reserves is still under debate in Chinese official and academic circles. Some have advocated a freewheeling approach that would pursue political as well as financial ends, for instance by buying stockpiles of minerals that China needs to import. Others have pushed for a conservative style more like a pension fund, which could involve buying blue-chip stocks to supplement the current heavy reliance on bonds. "I think they're doing what any responsible investor does and that is to diversify one's portfolio," U.S. Deputy Treasury Secretary Robert Kimmitt told reporters in Potsdam, Germany, at a Group of Eight meeting during the weekend. Mr. Kimmitt said the Treasury hadn't seen any drop in China's interest in buying U.S. debt since it announced plans for the investment agency. "I don't see it as a zero-sum game," he said. News of the planned Blackstone stake came just before this week's U.S.-China economic talks in Washington led by U.S. Treasury Secretary Henry Paulson and Chinese Vice Premier Wu Yi. The run-up to talks has been dominated by U.S. complaints about China's currency, which many U.S. politicians say is kept artificially low to give Chinese exports an unfair advantage. Chinese leaders say they don't have a policy of pursuing a trade surplus and have repeatedly said they want to reduce the imbalance, which contributes to inflationary pressures at home as well as to trade frictions abroad. An investment in Blackstone would be one way for China to show it is willing to increase its flow of dollars to the U.S. to try to balance the flood of dollars into China. It would also help the U.S. administration defend itself against charges of protectionism, which has been a sore point for the Chinese since U.S. political opposition helped scuttle the Chinese state oil firm Cnooc Ltd.'s attempt to buy Unocal Corp. China's Ministry of Commerce and several Chinese chambers of commerce have organized a delegation that is visiting more than 20 U.S. cities with the aim of boosting Chinese imports of U.S. products and increasing Chinese investment in the U.S., ministry spokesman Wang Xinpei told reporters last week. A high-profile government investment in Blackstone could also help improve the image of Western private-equity firms in China, where they have struggled to duplicate their success in other markets and have sometimes encountered political resistance from the government on deals they do manage to arrange. In one highly public case, private-equity firm Carlyle Group has encountered numerous delays in its attempt to buy a Chinese construction-equipment company, and has revised terms of the proposed deal several times. In part because of that example, U.S. officials have publicly raised worries that "economic nationalism" in China could be blocking foreign investment. Bankers and lawyers say it has become more difficult for private-equity groups to get the requirement government approvals to buy local firms. Blackstone in January hired former Hong Kong finance secretary Antony Leung as chairman of its China business. Mr. Leung who is an independent director of China's largest bank, was involved in the negotiations, the person said. Prior to his government post which he resigned in 2003, he was the Asia chairman for J.P. Morgan Chase & Co., after two decades at Citigroup Inc.

To: John Pitera who wrote (7868)	5/22/2007 12:33:40 AM
From: John Pitera	Read Replies (1) \| Respond to of 33421

Will Weakness In Dollar Bust Some Couples? Currency Divorces Loom As Nations May Move To Head Off Inflation By JOANNA SLATER and MICHAEL M. PHILLIPS May 22, 2007; Page C1 The weakening dollar may prompt some nations to reconsider tying their economic fortunes to the U.S. currency. On Sunday, Kuwait said it would decouple its currency, the dinar, from the dollar in order to fight inflation. Its move resonates not just in the Middle East, but as far away as China and Ecuador -- other countries that also tie their economies to moves in the dollar. Last week, in response to concerns about an overheating economy, China said it would let its currency, the yuan, fluctuate slightly more than it did in the past, a small but symbolic step away from past practices. Yesterday the dollar strengthened 0.3% against both the euro and the Japanese yen. Late in New York, one euro bought $1.3470. However, over the past several years, the dollar has weakened significantly against a swath of currencies. The two main exceptions to that trend: China and the oil-rich countries of the Persian Gulf, all of which continued to tie their currencies closely to the dollar. "There's now some evidence of a move toward greater flexibility from those two blocs," says Jens Nordvig, a currency strategist at Goldman Sachs. So far there is no indication that other Persian Gulf states with dollar pegs -- particularly Saudi Arabia, the region's largest economy -- intend to follow in Kuwait's footsteps. The central banks of Saudi Arabia, Qatar, Oman and Bahrain all rejected a change in their exchange-rate policies. The United Arab Emirates has said in the past that it won't alter its policy unless accompanied by other Gulf countries. If these countries were eventually to follow suit and abandon their links to the dollar, it could have important long-term implications for the U.S. One is positive: When foreign currencies rise against the dollar, it helps close the gaping U.S. trade deficit by making American exports less costly abroad and therefore more attractive. Indeed, the Bush administration has strongly urged China and other countries that have controlled exchange rates, as well as mounting stockpiles of U.S. dollars in their national reserves, to let their currencies appreciate. The danger is that a falling dollar might also make the oil producers, China and other nations with big U.S.-dollar reserves more reluctant to invest in Treasury bonds and other dollar assets. If that happened, the dollar might weaken precipitously and U.S. interest rates might climb, choking off economic growth in the U.S. In general, countries fall into one of several categories when it comes to exchange rates. Some countries adhere to a regime of fixed exchange rates, either against one currency or a basket of currencies, and allow fluctuations only within a very narrow band. (China falls into this category.) Others, such as India, adopt a policy of managed exchange rates, where their governments intervene to prevent them from appreciating or depreciating. A third group lets its currencies float more or less freely. A final category of countries -- including Ecuador -- uses the U.S. dollar as its official currency. In many respects, Kuwait and other Gulf nations are dealing with the side effects of their own prosperity. Economists say that the flood of oil money flowing into the Gulf region is likely to make pegs to the dollar increasingly costly to maintain. As oil prices have risen in recent years, those countries have received an unprecedented flow of dollars into their coffers. Annual revenues from oil and gas more than tripled from 2002 to 2006, according to McKinsey & Co. Now they are slowly increasing government spending, and inflation has picked up in most Gulf states as more than $1 trillion in construction and development projects in the region get underway. One way that countries minimize inflationary pressure is by raising interest rates, but nations that tie their currencies closely to the dollar are limited in the degree to which they can raise rates. Another way for a nation to counteract inflationary pressure: Let the currency strengthen. If you're an oil exporter, "You'll want a strong currency to prevent overheating" of the economy, says Barry Eichengreen, an economist at the University of California at Berkeley. "Pegging to a declining dollar has the opposite effect." Kuwait's inflation rate was 3.7% in December but climbed to 5.5% at the end of March. Qatar and UAE inflation rates touched 10% or above last year. Kuwait tied its dinar to the U.S. dollar in 2003 as part of a six-nation Gulf Cooperation Council plan to introduce a common regional currency in 2010. Kuwait's decision to strike out on its own -- by pegging the dinar to a basket of currencies -- is likely to delay the implementation of that plan. The plan for monetary union, which included a peg to the dollar, was hatched when "the dollar was strong and oil at $20 a barrel," says Brad Setser, senior economist at RGE Monitor, an economics Web site. Since then, of course, not only has the dollar weakened, but oil prices have soared -- a complete reversal of the original circumstances. Overall, exchange rates pegged to the dollar have fallen out of favor around the world. Even in Latin America, where leaders in volatile economies viewed a fixed exchange rate as a life-rope to stability, the view of the dollar has soured in recent years. That was one of the painful lessons of the global financial crisis that rippled through Asia and Latin America in the late 1990s. One by one, countries that pegged their exchange rates to the dollar found themselves forced to drain their foreign reserves to keep their currencies from falling. And one by one, the countries discovered that they were unable to beat back market forces and finally had to abandon the pegs for more flexible systems.