Tuesday, May 22, 2007

China and Private Equity

History, as we know, does not actually repeat itself, but there are often interesting parallels that can be drawn.

A huge shift in global capital flows is forecast after the Chinese government's acquisition of a $3bn (£1.5bn) stake in the sprawling US private equity group Blackstone, owner of CafĂ© Rouge restaurants, Madame Tussauds and Center Parcs.

The purchase, though substantial in its own right, is likely to be only the starting point of a $200bn foray into world stock markets and private companies by the communist government in Beijing.

China has the world's biggest foreign exchange reserves, worth $1.3 trillion and growing by $1m a minute. Until now, most of this has been invested in safe but low-yield US treasury bonds. With the dollar slipping in value, policymakers in Beijing are diversifying into riskier but potentially higher-return private equity.

You see, something very similar happened back in the late 80s early 90s. Then it was Japan that had all the money: the gardens of the Imperial Palace in Tokyo were valued as being worth more than all of London. So various Japanese investors started buying those oh so cheap US assets: the Rockefeller Center, various Hollywood studios etc.

They found out the hard way that they had grossly overpaid. Will the same thing happen this time?

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