Thursday, August 02, 2007
China faces public backlash as Blackstone investment backfires
By Keith Bradsher
Published: August 2, 2007
HONG KONG: The first purchase by the Chinese government's new overseas investment fund, a $3 billion stake in the Blackstone Group, has backfired badly and produced an unusual public backlash within China.
Blackstone shares have fallen steeply since the company went public June 22, pushing down the value of the government's investment by more than $500 million in just six weeks. Bloggers and even some Chinese financial media have frequently mentioned the dwindling value of the government's stake, and some have been highly critical.
"O senior officials of the Chinese government, please do not be fooled by sweet-talking wolves dressed in human skin," said one of several Internet postings compiled by an anonymous blogger on Sina.com, a Chinese Web site. "The foreign reserves are the product of the sweat and blood of the people of China, please invest them with more care!"
In a sign that the Chinese government may be censoring criticism on the sensitive issue of government investment losses, the blogger's entry was visible on the Web site on Thursday afternoon but had disappeared by Thursday night. Other entries by the same blogger were blocked, but milder criticisms of the Blackstone investment could still be found.
"It is really alarming the speed with which the Chinese government entered into this investment," said another posting, signed as "anonymous person 586215," that remained on Sina.com through Thursday night.
For many years, China's central bank followed the example of most central banks by investing the bulk of its assets in Treasury bonds and other government bonds. But as China's foreign reserves have soared to $1.3 trillion, the government has started chasing higher returns - and is now learning that this involves greater risk and sometimes losses.
Over the last several years, the People's Bank of China has led the way among central banks in buying U.S. mortgage-backed securities, accumulating an estimated $100 billion worth of them, according to people with knowledge of the central bank's trading. The People's Bank of China has long chosen some of the most creditworthy tranches of these securities.
But with the malaise in the U.S. housing market, even the value of some previously creditworthy mortgage investments is starting to erode. The Chinese central bank abruptly halted purchases of U.S. mortgage-backed securities in May, although it does not appear to be liquidating existing holdings, said one person who follows the bank's trading practices closely.
This person insisted on anonymity because of the central bank's policy of banning transactions with any individual or institution that discloses information about it.
China's loss of appetite for U.S. mortgage-backed securities and its indigestion from the Blackstone deal do not mean that China has lost interest in overseas investments. The China Development Bank, a state-owned institution, agreed last week to invest €2.2 billion in Barclays, the British bank, and to invest another €7.6 billion if Barclays won the ongoing bidding for ABN AMRO.
With China running a trade surplus that hit $26.91 billion in June, the central bank is issuing torrents of yuan and frantically buying dollars to prevent the yuan from rising quickly against the dollar in currency markets. The government's large purchases of dollars, and of other currencies to a lesser extent, has created a big problem of how to invest the money.
The government's latest solution is to begin creating a so-called sovereign wealth fund: a government-owned investment company that issues yuan-denominated bonds in China and uses the proceeds to buy dollars for overseas acquisitions.
Although the company has not even been legally chartered yet, the Blackstone acquisition was made on its behalf by another government entity.
Jesse Wang, the chairman of the other entity, who is expected to become the leader of the investment company, declined on Thursday to discuss the Blackstone investment. Blackstone also declined to comment on the recent criticisms in China.
As credit markets began to deteriorate this spring and pressure grew for higher taxes on private equity funds, Blackstone's leaders shrewdly pulled forward the date of the company's initial public offering and priced it at $31 a share, the top of the planned range. The stock rose on June 22, the first day of trading, but has slumped steeply since then.
Blackstone shares recovered slightly on Thursday, rising 74 cents to $25.05 in afternoon trading in New York.
Foreign investments are particularly tricky for the Chinese government because of virulent nationalism, born of centuries of foreign invasions and occupations like the British capture of Hong Kong in 1841 and the Japanese capture of Manchuria in 1931.
The same online writer who warned of wolves in human skin also cautioned that, "These fierce wolves are similar to the foreign thieves who pillaged our forefathers, only they are all the more cunning and manipulative, but their goal of pillaging China does not change with the centuries."
In another sign of the growing role of sovereign wealth funds, Morgan Stanley announced on Thursday that it had hired Dina Kos to the new position of managing director for central banks and sovereign wealth funds in the company's investment management division.
Kos, who will be based in Hong Kong, had been the executive vice president for markets at the Federal Reserve Bank of New York.
Chinese officials have called for other countries to accept government investments in their companies without discrimination. But China's own record on this issue is murky.
In a little-noticed move on July 18, the government of Hong Kong, a semi-autonomous Chinese territory, introduced a new banking policy. Any bank that is at least 20 percent owned or controlled by a foreign government-controlled entity was banned from participating in the issuance of legal tender. HSBC, the Bank of China and Standard Chartered currently issue Hong Kong's currency under tight government regulation.
The new Hong Kong rule came after Temasek, one of Singapore's sovereign wealth funds, bought 12 percent of Standard Chartered last year, and as Temasek and the China Development Bank were negotiating to take stakes in Barclays.