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China buys, I sell

• Robert Peston
• 21 May 07, 08:39 AM

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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