More evidence that China will spend treasuries to buy everything


China Eases Overseas Share Curbs

By Jamil Anderlini
Financial Times, London
Thursday, June 21, 2007

BEIJING -- China's securities brokerages and fund managers will be allowed to invest in overseas stocks and bonds for the first time as Beijing looks to reduce soaring foreign exchange reserves and provide alternative investments for its citizens.

The China Securities Regulatory Commission issued new regulations on Thursday allowing the country's 110-odd securities firms and 57 fund management compan­ies to apply for qualified domestic institutional investor (QDII) quotas to invest in offshore securities.

Fund managers had about $138 billion under management by the end of the first quarter, while securities firms had $84 billion under management at the end of 2006. Until now, only one fund manager, Shanghai-based Hua-an, had been allowed to invest overseas, alongside 18 banks and three large insurers, under a pilot programme begun last year.

Beijing has handed out nearly $19 billion of QDII quotas to these institutions but just a fraction has been used, because its policy of slow but steady currency appreciation makes offshore investment unattractive.

By expanding the programme the government expects to generate much greater enthusiasm among investors, eager to trade shares in Chinese companies listed in Hong Kong, whose shares are roughly twice as expensive on the mainland. Such a price discrepancy is a result of China's rigid capital controls and a lack of investment options on the mainland, which has contributed to the Chinese stock market frenzy and quadrupling of valuations in the past two years.

"There is a very good case for arbitrage between Hong Kong and mainland-listed shares right now so this is a very good time to sell funds based on overseas stocks," said Qu Hongbin, chief China economist at HSBC.

Hong Kong's HSCEI Index, which covers mainland companies listed in the territory, rose 2.5 per cent yesterday on news of the regulatory change.

So-called "H-share" companies listed in Hong Kong are expected to be the biggest beneficiaries of the QDII scheme because they are already familiar to mainland fund managers.

A Beijing-based fund manager said all China's biggest and best fund companies had already prepared their QDII products and were just waiting for licences to be issued. "The bigger the quota we can get, the better," the manager said.

The expansion of QDII is another step toward opening China's closed capital account and is aimed at recycling some of its massive and rapidly growing foreign exchange reserves.

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Treasury Nodded Through Blackstone's China Deal

By Stephanie Kirchgaessner
and James Politi
Financial Times, London
Thursday, June 21, 2007

Blackstone was given an informal nod by the US Treasury Department that a $3 billion investment by China did not merit a national security investigation, according to people familiar with the deal.

The private equity group, which is making its stock market debut on Friday, received the "favourable" opinion after approaching the Treasury before and after the deal was sealed. The Treasury department chairs the secretive inter-agency panel that vets foreign deals on national security grounds, which is known as Cfius.

The development will not be welcomed by Virginia Sen. Jim Webb, who raised questions about the investment in a letter to Hank Paulson, Treasury secretary, and other officials this week.

Mr Webb said the investment presented an "opportunity for undue influence" by the Chinese government into potentially sensitive US deals and deserved a formal investigation by Cfius.

A Treasury official on Thursday said that the Treasury did not, in general, give "informal nods" on Cfius matters, and that it was reviewing Mr Webb's letter.

Washington experts were sceptical that the Bush administration would initiate an investigation into the deal because such passive investments would not traditionally trigger a security review. "There doesn't seem to be a Cfius issue here," said Nancy McLernon of the Organization for International Investment, which lobbies on behalf of foreign companies. Ms McLernon and others said the deal did not represent a change in control of Blackstone and did not meet the threshold of a 10 percent change in ownership.

Mr Webb said he was relying on expert opinion that the Chinese investment vehicle would, in effect, own as much as 40 percent of Blackstone because of the structure of the deal.

Although the Virginia lawmaker ostensibly focused his concerns on national security issues, some experts say the letter underlines another fear on Capitol Hill: that US companies cannot fairly compete with state-owned counterparts in China.

A bid by a Chinese oil company, CNOOC, to take over US-based Unocal was quashed in 2005 after lawmakers said the transaction exposed an unfair competitive advantage.

"During the CNOOC transaction, I don't think the national security concerns resonated. The competitiveness issues resonated because the investment was coming from a government-owned entity and it is very difficult for a privately controlled company to compete with that," Ms McLernon said.

Mr Webb's letter was sent as the private equity industry -- and Blackstone specifically -- is facing pressure from lawmakers who are agitating for change in the way the companies are taxed.

U.S. Rep. Charlie Rangel, the chairman of the powerful House Ways and Means Committee, which has primary jurisdiction over tax legislation, on Thursday said he would conduct a "thorough examination" of the issue in a hearing after the July 4 holiday. "After speaking with representatives from the financial services and investment banking industries, it is clear to me that the failure to act and clarify the law is much more serious than the question of an effective date in legislation," Mr Rangel said.

He was referring to a separate proposal in the Senate that would force partnerships going public after June 14 to submit to a 35 percent rate normally levied on corporations. Current law allows private equity to go public as a partnership paying a 15 percent tax rate.

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