KEY POINTS:
It's Been an amazing couple of weeks in China. A spate of initiatives have been reported that remind us how the China-US relationship is rapidly becoming the most important bilateral one on the planet.
Before the United States-China trade talks taking place in the US this week, China
raised its one-year deposit rate and loan interest rates to 3.06 per cent and 6.57 per cent respectively, widened the band within which the yuan can trade against the dollar and invested US$3 billion in private equity group Blackstone (which will buy it just under 10 per cent of the company).
Combined with China's US$33 billion shopping spree in the US for high-tech equipment and jets, it's clear the leadership is doing its best to head off the usual anti-China noises that are rumbling in Congress.
They will and won't succeed. Sentiment in the US over China is split along class lines. Company CEOs and shareholders are making good money out of China. Half of Chinese exports are made by foreign-invested firms there. US companies such as Wal-Mart source billions of dollars of goods from China. And financial services companies from the US are salivating about the prospect of entering China's booming stock and asset management market.
But the US working class is having a more ambiguous relationship with China. Jobs in manufacturing are disappearing - at least, that's how the US explains the US$214 billion trade deficit with China, more than one-third of the US's total deficit with the outside world.
On the upside, these people are benefiting from the price deflation that the Chinese economic miracle has brought with it. They may be earning less, or be unemployed, but basic goods have never been cheaper.
You could also argue that if these people are homeowners or shareowners, their wealth has been lifted by the benign economic environment to which China has made such an important contribution.
American business friends of mine are saying the mood in what is now a Democrat-dominated Congress is becoming viciously anti-Chinese.
Of course, these politicians must be sensitive to their constituencies. But there is simply so much money involved that I wonder if they will really stick up for their working-class countrymen. Companies eyeing China's vast and growing markets are not shy of paying lobbyists millions of dollars to get them onside.
The investment in Blackstone looks as if it should come under the heading of political lobbying, given the amazing connections such companies have. But although Blackstone has pulled off the PR deal of the year, I'm surprised it saw the need for it.
I would say that although the investment looks like a favour from China, in fact it could be argued that Blackstone is doing China a favour - possibly in return for less rigorous oversight on doing deals in China.
If there is one thing a company like Blackstone doesn't need in the current environment, it's money. The world is awash in cheap liquidity and investors are fighting tooth and nail to get a crack at an investor spot in the world's giant private equity companies.
What a company like Blackstone does need is investment opportunities. At the moment, China is a huge insult to foreign private equity firms.
Supposedly chock-a-block with thousands of firms requiring the expert advice of foreign private equity investors, the private equity market in China last year was less than US$1.75 billion - that is, roughly similar to the private equity market of Israel, with a population of under six million.
Yet all these Chinese firms, which are supposedly corrupt, chaotic and/or collapsing, are generating record earnings - and that includes the Chinese-listed firms, which used to be considered the worst of the lot.
Chinese firms clearly feel, and rightly so it would appear from the evidence, that they have no need to sell precious ownership rights in return for cash and expertise.
So what Blackstone could be buying is the expectation that deals it will be engaged in will be getting the thumbs-up from the Chinese authorities. Unfortunately, it's not that simple. Private equity sources in China tell me it's never been harder to get investments approved by the central Government.
"There's a disconnect between what the Chinese central government is allowing and what the provincial government is allowing," one banker said. "The local government are far keener than the central government to attract foreign investment."
I wonder if he's right. China is now so awash with its own cash - earned through the awesome performance of its corporate sector - that the need for foreign capital is decreasing.
Foreign investors put around US$60 billion a year into the Chinese economy in the form of foreign direct investment. Yet China has US$1.2 trillion in foreign exchange reserves - money that has accumulated in great part from China's export performance and has been converted into forex to prevent domestic inflation.
What China will get from investing in Blackstone is expertise in how to invest in private equity deals. Recall the country has announced it will invest some US$300 billion of its forex assets abroad. If China were primarily interested in windfall gains, it would have invested as a limited partner. But by investing directly into the company China can see from the inside how these elite capitalists operate.
Ironically, given how few investment opportunities these companies have found in Asia, the Chinese may be rather disappointed in what they learn.
