China Law Blog

Of course it will work. Western corporations and financial institutions have been kowtowing and ankle-grabbing for Beijing for 25 years now. These PE companies may be able to get the rules bent a little more in their favor, but chances are they will have to help Chinese companies (aka the chinese gov't) and Chinese investors gain greater access to US companies, real estate, technology, etc.

I'm not sure if it has something to do with my fondness for the Waterstone cabernet, or the dire straits that the PE group and the mercenary company have in common, but I always have to take a second look at the name to make sure that I'm reading about corporate raiders rather than Iraqi raiders.

And that unnecessarily long introduction has brought me around to the point that grasping at straws in the Chinese market might work for Blackstone. Blackstone constructed their equity in real estate trusts. Something came out in the past couple months about a bubble associated with securities in real estate? Blackstone took a large hit when the bubble burst because they did not know when to get out. Now, Blackstone is sacrificing the usual level of control and taking on a more substantial risk than usual because they are seeking to make the sort of profits that would make Paris blush in a bubbalicious market.

It has been suggested that this bubble is here to stay, and I don't doubt that, but Blackstone needs to take a more pragmatic view of the size of the bubble that can be blown with the mass of gum that is China. There are other considerations, such as elasticity of the gum, cohesiveness of the gum, the precise manner in which it has been chewed, basically the difference between Wrigley's and Big League Chew, but important differences in composition nonetheless. The key finding is that a nicely composed bubble which can be reformed and blown again is a helluva lot more satisfying than gum all over your face.

When confronted with this conundrum, I like to think of Joe Kennedy: It is high time to divest your stock when the shoe shine boy gets rich off the market. How many Chinese shoe shine boys have made a killing on the Shanghai Index?

One sensed this sort of attitude in the slightly pathetic joy with which CVC was reporting (in the FT) that it had managed to secure a US$232m investment in Zhuhai Zhongfu yesterday. "The regulators said yes, isn't it great!" the piece seemed to say, but then one noticed that it was another minority stake.

One really has to wonder whether it's wise to be putting up so much money for minority stakes in a country not exactly renowned for favouring minority shareholders. Still, the private equity firms are only doing it as their clients insist on throwing money at China. I just hope the PE firms are explaining the risks properly to the investors or there could be a pile of lawsuits later...

Dan have you ever thought of a career as a newswire service? You should syndicate more.

nh,

I meant to ask whether these companies will get the returns they seek.

William Lewis,

So far, just about everyone but the shoe shine boys, which are pretty uncommon in
China in any event.

Duncan,

And that is exactly why I posed the question.

Groucho,

What do you mean?

@ Dan,

These companies will get returns, otherwise more investors may be slow to follow. But repatriating the profits may be an issue. I hear it is tricky to do now and may become more so later.

A comment from Chris D-E might be in order on this issue.

nh,

Actually, Steve is an expert on this issue, but it is far too complicated to comment on here. But you are right to raise that as an issue and in conversations we have had with some of the investment companies and some of our own clients, we have heard admisssions that they do not know how they will get all of the money out, but they figure things will change by the time they need to do so.

Then again, they may not. We have handled more "money problems" for clients in the last three months than in the prior three years.

Interesting exponential curve in those types of cases, eh Dan?

I am not a economics person by any means, but I do gleen from others and do a fair share of reading and China seems to resemble a "fiat economy" where the gov't does all it can to keep the currency circulating only internally and printing money as needed to provide liquidity to drive consumption via loans and credit cards.

Thus, the RMB's only real value may be tied to China's foreign currency reserves or the RMB has no real value at all. And Beijing will certainly not let RMB leave the country, especially in foreign hands. That provides a larger and larger pool of capital to give to regular Chinese to buy consumer items and buy stocks.