China buys the American way

The purchase of a big stake in the Blackstone Group is a bet on Wall Street-style short-term profit maximization.

Published May 21, 2007 9:16PM (EDT)

The Chinese government's decision to buy just under 10 percent of the Blackstone Group, a private equity behemoth, is big news for both finance geeks and China watchers. The first line of ubiquitous analysis goes like this: China has been accumulating huge reserves of foreign capital, and is tired of the relatively poor return on investment it has been getting from reinvesting that money in U.S. Treasuries. In the search for a better bang for its megabucks, why not imitate Wall Street, where hugely profitable private equity firms are currently the flavor of the moment?

But since this is a China story, one also can't avoid its implications for the fraught Chinese-American relationship. Some observers think that China is trying to ease trade tensions by pouring capital back into the United States. And China has carefully targeted its proposed purchase at under the level that would require U.S. government approval, in a likely attempt to avoid the political backlash that erupted when CNOOC, a state-owned oil company, attempted to purchase Unocal. Meanwhile, Blackstone may be encouraging the deal as a way of facilitating its own efforts to purchase stakes in Chinese companies.

Neither the New York Times' nor the Wall Street Journal's coverage of the story on Monday gave a comprehensive accounting of the slate of companies that Blackstone currently owns. This would seem like a key part of the story -- would China's stake in Blackstone give it an indirect piece of anything politically sensitive? Were there any oil companies, transportation facilities or other sensitive American assets to be had? But this turns out to be a harder question to answer than one might expect. Blackstone's stable of companies -- which include hotel, semiconductor, office building and wireless telecommunications companies -- is a constantly shifting kaleidoscope. In case after case, Blackstone will conclude a huge deal and then almost immediately sell off large portions of what it has purchased, keeping only the most profitable slice for itself. It is hard to discern any "strategy" per se, other than the holy writ of maximizing short-term profit.

So China isn't really buying physical American assets when it pumps $3 billion into Blackstone; it's buying into the American way of capitalism -- the theory that the best way to invest your money is doing whatever pumps up the profit margins rather than going for the long haul. There are plenty of smart people who have been arguing since at least as far back as the days of the junk-bond kings that this strain of creative destruction builds value for an economy in the long run by maximizing efficiency and punishing ruthlessly anyone who fails to achieve the greatest returns. But it's also intriguing how sharp the contrast is between the behavior of the Blackstone Group, and the behavior of China's government, with respect to how the latter invests its money in China. There, the emphasis has been on maximizing long-term benefits for the country as a whole by pouring funds into infrastructure -- transportation and energy -- and advanced research and technology.

China appears to have adopted a best-of-both-worlds approach, simultaneously beefing up its long-term ability to flourish in the global economy by creating a domestic environment that encourages companies to actually make stuff while profiting in the short term by investing oodles of cash in companies like Blackstone, which focus only on making money. Who says you can't have it all?

By Salon Staff

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