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China: The New Global Hedge Fund

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Tags Financial MarketsGlobal Economy

06/02/2007

I have been covering the story of the sovereign governments' ongoing ventures into capital markets with their accumulated currency reserves (see: 1 2 3 4 5).

The Economist has done a great piece on this (The World's Most Expensive Club) providing statistics showing the size of the sovereign investment funds relative to the world's capital markets.

Until recently, China's holdings of dollar-denominated assets consisted primarily of US Treasury debt. Earlier this month, the Financial Times reported that China has agreed to place $3Bn (of its approximately $1Tn in foreign exchange), with Blackstone, a private equity financier. The Financial Times reports (see:China to Take $3 Billion Gamble on Blackstone, Trickle of Chinese money could become investment flood, China to buy 10% stake in Blackstone while yielding voting rights ):

The Chinese government is to use $3 billion of its vast foreign exchange reserves to buy a 9.9 percent stake in Blackstone, the US buyout fund, in an unprecedented move that underlines Beijing's desire to tap into the private equity boom.

The investment will coincide with Blackstone's landmark $40 billion stock market listing, expected in the next few months, and will allow the private equity group to nearly double its original target of raising $4 billion.

Stephen Schwarzman, Blackstone's chief executive, hailed the deal -- the first time Beijing has invested its foreign reserve in a commercial transaction -- as an "historic event that changes the paradigm in global capital flows."

I don't have a lot more of an analytical nature to say about this than what I have said in my previous posts. This venture of government money into private capital markets presents a problem raised by Mises in his critique of economic calculation under socialism: financial asset prices do their job of helping entrepreneurs allocate capital only in the context of a private property system of capital ownership. The return derived from the assets is a function of entrepreneurship, while the modern finance view tends to see assets as having certain historical returns related to their volatility, without providing a causal-genetic explanation for how those returns are achieved.

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