China buys, I sell
It is the totemic deal of our age: the , the leading US buyout firm, for $3bn (£1.5bn).
The creator of the global financial boom, China, has formed a partnership with one of the great manifestations and beneficiaries of that boom.
But it’s also quite an unnerving event. China’s desire to enjoy the private-equity spoils that its behaviour has created may signal the peak of this phase of global financial mania.
Here’s why.
The boom in private equity, hedge funds, stock prices and almost every asset class on the planet is the product of a world of excessive liquidity and low yields.
And one of the main drivers of this world of excessive liquidity and low yields is that the Chinese government has driven down interest rates over many years by placing the bulk of its $1200bn in foreign reserves in low-yielding US Treasuries.
But the penny has now dropped in Beijing. The Chinese – like almost every other investor in the world – now want something better than the paltry yield on US government bonds and the capital losses of a faltering dollar.
They want a slice of the sumptuous private-equity pie that they helped to create by splurging all their hard-won cash on US government debt.
But there’s a contradiction here.
Were the Chinese to divert their cash flows significantly away from US Treasuries and into private equity and other asset classes to a significant extent, the yield on Treasuries would rise and the return on these other riskier asset classes – including private equity – would continue to fall.
And there would come a moment when the price of these riskier assets would be ludicrously high by comparison with the price of a low-risk, US government bond – and at that moment, the bubble would be pricked.
So when the Chinese are buying into private equity – even if they are buying into a management company, as they are in Blackstone’s case, rather than putting cash in Blackstone’s investment funds – every investor in the world should take note.
If the end of the era of cheap Chinese-subsidised money were nigh, there would be a global market slump in hedge funds, private equity, shares, bonds, property, commodities and precious metals which would touch almost every life on the planet.
It would be absurd to forecast that kind of meltdown on the basis of a $3bn investment in Blackstone, but there’s a toxic smell around that deal.
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Well done Robert. At last people are starting to notice the clouds looming over the horizon. With the Chinese Stockmarket up some 300% this year, this story, and lots of other snippits giving the picture of a bubble about to burst, one wonders where will be safe to shelter one's savings.
Gold, the ultimate store of value took a hit in last May's correction and will surely head south along with all the metals when the Chinese market overheats.
The shift away from US T-Notes will impact the US hard and knock an already unsound US economic situation. I'm not always so pessemistic but this has all the feel of 2000-2001 all over again and it's time to take shelter!
Yes agree, all asset classes will come under pressure. Everything seems so expensive, be it gold, property, shares etc.. Cash is king!
Absolutley spot on. The US is printing and the Chinease are hoarding, and this simply can't go for ever. Best place to park money is in companies with less debt and sound products. Keep well clear of private equity funds. One just hope the US will return to its conservative traditions and financial discipline soon.
Exactly my feeling when I read the story. And not just the liquidity implications; there were echos of the shoe shine boy asking JP Morgan for a stock tip.
Time to take those profits and go and earn 6.25% from 1 year cash....
There is a second paradox at work here. Many hedge fund strategies only work at small(ish) volumes, and are based on observations of how the markets tradionally operate. Too much money chasing the same strategies, and the tail will start wagging the dog.
Y'all are chicken little. China investment is Blackstone is a paltry $3 billion out of a $1.3 Trillion. The safest investment for them is still the U.S. Treasury. The $3 billion is nothing but a small portion of the interest earned on their investment on T-bills. The bubble will not burst but I do agree there will be corrections of and on and will attack each asset class on a rolling basis.
Absolute nonsense ! You surely aren't naive enough to think that the Chinese don't analyze very, very carefully what they do with their money and its effect on markets. Rest assured they are fully aware of all the possible consequences of their huge investments.
I suppose when you have to produce something on a daily basis, you could well end up with a piece of cheap-shot scaremongering like this.
Undoubtedly, there will be "market corrections" in the future when necessary, but the "bubble" analogy is past its sell-by date.
China has all the right to divert and invest its hard-and bitterly earned currency, particularly with the U.S. vis-a-vis a smart tactic to counteract with the Yank's tricky curency-manipulation. Since U.S. finds it haards to control China's stubborn RMB policy,even more to put Yuan under its command, the only way was/is to devalue the dollars and thus indirectly causes the RMB to rise---merely a cat-and-mouse game. In reeturn,China put the money and invest elsewhere--not in one baset--to counter balance Yank's moveThere aint fair trade in U.S. as the example of the UNICHOCL'S intent into an U.S.Oil corp.A jolly smart "Art of War" move.
If the worlds markets are as linked as we are led to believe then I agree the meltdown will be global and be started in China.
This has a ring to it that reminds me of the Bird Flu scares however, and just as they fail to materialise so I think will this.
We have all been waiting for a return to what we consider "normal" levels of $/£ and UK house prices but lets consider the possibility that these changes are not bubbles but long term corrections in levels.
China is not a bubble it is real growth and economic development that will not be turned around overnight amid a market crash, there are 1 billion real people there who now work not on family farms but increasingly in an important international business centre.
The Sino-Blackstone deal raises further questions: will the "Great Wall of Chinese Money" that flows into private equity markets from the investment bid up the price of private equity opportunities that are already scare (well, good ones are!)
But more fundemental, should any country be using its reserves to try and make a profit, especially such a risky profit as private equity profits - high return high risk?
With their boots full of US IOUs (Treasuries) the Chinese are wide to diversify, but is this the right diversification?
The Sino-Blackstone deal raises further a issue: the "Great Wall of Chinese Money" that flows into private equity markets from the investment will have to find a home and will bid up the price of private equity opportunities that are already scarce (well, good ones are!). That will create more leverage for private equity firms to invest in lower and lower rated prospects.
But more fundemental, should any country be using its reserves to try and make a profit on them. Reserves are, well, reserved. Its bad enough the Chinese are betting their reserves to make money on them but they are putting their chips on the private equity roulette wheel
With their boots filled with flimsy IOUs (US Treasuries) the Chinese are wise to diversify But is private equity the responsible diversification for the Chinese AND the rest of the world.
I agree an awful lot of people could be hurt be a liquidity crunch. But will this be instigated by the Chinese reducing their appetite for US bonds or a general down turn in the US economy? I would go with the latter as the Chinese government will be keen to maintain the current export inbalance with the US and not to revalue their currency (despite US pressure). The political establishment will be the ones calling the shots and will not want to risk economic stability, especially as this could have massive social and political implications for China. I would argue that the renewed inflationary pressures and interest rate rises both in Europe and the US will be the main factor in the changing economic climate.
It's the perfect partnership. As interest rates rise, all the distressed companies can be picked up cheaply using the CN cash pile.
Look out for CN owning a trillion dollars worth of prime US industry in the coming years..
I READ AND ENJOYED YOU ANALYSIS VERY MUCH SO AND AGAIN YOUR IN THE MONEY,
AMERICAN / EUROPEAN AND MOST WESTERN WORLD MARKETS HAVE ENJOYED FANTASTIC GAINS IN THE PAST AND NOW EVERYONE IS IN IT ONLY FOR THE PROFIT,RISK IS SO LAST YEAR, BUT MARKETS ARE TWO WAY STREETS AND WITH MOST MAJOR MACROECONOMYS FULLY SHACHLED WITH DEBT IT WILL BE MOST INTRESTING TO SEE WHERE THESE BIG YIELDS COME FROM WHEN INTREST RATES ENGAGE THE ENGINES OF COMMERSE AND NOT LEAST THE AMOUNT OF DEBT AMASSED ON ASSETS THAT HAS TO BE PAYED OFF OR WRITTED OFF BALANCE SHEETS,FOR SURE PROBLEMS AHEAD.
How true Robert, but what a pity the "so called" experts cannot see the wood for the trees. Greed has blinded all reason and sensibility. With P/E ratios of 50+ for companies on the Chinese stock exchange the only way is down, down, down.
I for one, will be glad to see the private equity funds take a huge hit. Their selfish greed has left them wide open and massively in debt.
It will be interesting to see how much longer this hedonistic euphoria carries on before it all goes belly up!!!
Could somebody exaplain to me what would happen if the chinese were to withdraw all money form the US bond system? and would this possibly have anything to do with the C hinese Governments RMB policy? Is this not really just a bout business
A $3bn deal in global terms is insignificant, and if this investment was in sector other than private equity it would not make such story.
Perhaps more telling is that Blackstone is going public , a contradiction in itself.
But it's a clear signal that the Blackstone partners are cashing in their chips..knowing that the market is nearing it's peak and in the middle of a public and media frenzy.
As further Hedge and Private Equity funds float, the savvy investors may see through the hype, realising that there is no mythical trick they perform on firms - Cutting costs and focussing on short term profit realisation.
The costs of buying firms will soar ever higher, with ever diminshing yields..
But by that time the financiers will have already moved on, having cashed their chips in the floatations.
Good work if you can get it ..
The China Blackstone deal was a 3 billion dollar entry ticket purchased by the Chinese to introduce themselves as a new type of asset buyer getting into the long term game of purchasing US assets not just IOU’s (treasury bills). Today inside the summit stadium the US and China had their opening ceremony with one of the largest Chinese delegations ever to visit the US and the US greeting their future asset purchasers with open arms. What a turn out, all kinds of hand shaking, picture taking, posturing, opinions, forecast, predictions, ect.ect. all for shaping future policy to benefit all parties involved.
The reporters are coming out with all kinds of after the fact predictions, like this one at Reuters predicting the Chinese will buy up all kinds goodies as if they are drunken sailors with a fist full of 50’s.
I predicted the Chinese will take their sweet time and wait for the opportunity when assets get cheaper and sellers are real sellers not just flippers. Sure they will throw a few billion here and a few billion there but what assets have the Chinese really lined up to purchase? The Chinese announcing the coming to America to invest today in times when things are rosy was not by accident it was planned with timing applied. They would have a very difficult time coming here say in a couple of years when the economy is down or a bubble pop and people had lost a lot of money. If they show up when things don’t look so good they may have a image of a liquidator. So you enter when the window is open with the least resistant to get your foot in the door and be accepted. Then you work your way into the assets you desired when capital is needed and long term deals are attractive, similar to the ones I have been predicting such as infrastructure using the PPP.
1. as history goes, when stock prices nosedive, property price rises.
2. What does Chinese really need to buy?
Resources.
High tech that can help improve pollution.
Look out to these sectors.
it wont happen! armageddon isnt here! if there is a problem the money printing presses will be operated at full steam; this is how central bankers always get out of a tight corner (ask helicopter ben); so short debt and long tangibles