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China Intrigued by Private Equity Investment, Despite Blackstone Losses

The steep paper losses that China has suffered on its $3 billion investment in Blackstone Group will not deter its embryonic sovereign wealth fund from making further investments in private equity and hedge funds, according to a senior official.

Shares in Blackstone closed on Friday at $24.08, down 22.3 percent from its $31 debut price in June.

The poor performance has sparked criticism of the investment within China, which bought its non-voting share at a 4.5 percent discount and agreed to hold onto it for at least four years.

"The company (Blackstone) is currently excellent in terms of both quality and earnings performance," Jesse Wang, vice chairman of Central Huijin, the central bank's investment arm, said at the weekend.

"If you are going to invest in a private equity firm, there probably is no better company," he told reporters on the sidelines of a forum in the southern city of Shenzhen.

Blackstone, which is also active in hedge fund investing, asset management and corporate advisory, last Monday reported that net income in the second quarter more than tripled from a year earlier to $774.4 million.

Wang, one of the officials who signed the Blackstone deal, said China would make more such investments worldwide once its state investment agency was up and running.

"If you want to increase yields and still maintain low risk, then you should put aside part of the money to make alternative investments, such as private equity firms, hedge funds and real estate investment trusts," Wang said.

He said he was expressing his personal view.

Wang said there was no timetable for the launch of the state investment company, although media have said it will be in September.

Wang declined to reveal the name of the fund, but said it would not be called State Investment Corp. He would not say either what benchmark China had set for the fund's investment returns.

Foreign Help

The agency will take over $200 billion of China's $1.3 trillion stockpile of foreign exchange assets from the People's Bank of China with a mandate to diversify the country's investment portfolio and seek higher returns.

Bankers believe some two-thirds of the reserves are now invested in dollar assets, principally bonds.

The Ministry of Finance will issue 600 billion yuan in special treasury bonds this week, the first tranche of a total of 1.55 trillion yuan, to the central bank in exchange for the assets, bankers say.

Wang said the new agency would hire foreign asset management firms to invest on its behalf, at least in the early days, as it lacked experience in the international markets.

"That's of course a learning opportunity for us -- to look at how they invest or ask them to help train our staff," he said.

China would also hire overseas management and investment professionals to help run the fund.

The agency's top management will include Gao Xiqing, vice chairman of the National Social Security Fund; Zhang Hongli, a vice finance minister; and Xie Ping, chief executive of Central Huijin, which will be folded into the new agency, according to media reports.

Central Huijin has pumped $60 billion into three state-owned commercial banks and analysts say it could be the vehicle to inject at least as much into two other banks -- Agricultural Bank of China and China Development Bank.

If so, the fledgling sovereign wealth fund would initially have much less than $200 billion at its disposal to put to work in global markets.

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