China + Private Equity

A few of my favorite things (NOT.) According to the Wall Street Journal, the Chinese government has decided to enter the private equity bubble, which it is largely responsible for creating. "The key thing to take away from the Chinese government's plan to take a $3 billion stake in private-equity firm Blackstone Group: If you're paying for the fuel, you might as well get some of the heat. China's huge trade surplus with the U.S. and other countries has given it plenty of cash -- and a problem figuring out what to do with it. Because China lets its currency, the yuan, fluctuate only in a narrow band against a basket of foreign currencies, it can't easily convert all the money it makes overseas into yuan; to do so would send the yuan higher. So China has been sticking its money into overseas assets... The 10-year Treasury note yields just 4.79%, less than the rate of 5.25% that the Federal Reserve has set on overnight bank loans. Mortgage-backed securities and agencies don't yield much more. A key factor behind those low yields has been that Chinese demand has kept prices propped up. (Prices and yields move in opposite directions.) Those low yields are part of what has driven demand for riskier investments such as junk bonds, emerging-market debt and, yes, private-equity firms. That's driven up prices and driven down yields on these securities, making it cheaper for private-equity firms to borrow and invest."