MNI on the CIC/Blackstone deal

BEIJING (MNI) - The investment by the Chinese government's new
sovereign wealth fund in The Blackstone Group ahead of the private
equity firm's initial public offering has fallen short of expectations,
a government official familiar with the situation told Market News
International.

The official, who asked that neither his name nor his department be
identified, said that the disappointment with the Blackstone deal
has prompted a rethink on strategy for the new investment agency, known
unofficially as the China Investment Company (CIC).

"CIC's investment in Blackstone missed our expectations. The next
step is that we need to do more cautious study about the investment
direction and field," the official said, without providing further
details.

The official's comments mark the first public reaction to a deal
which has come under domestic criticism for being ill-timed and badly
executed.

China bought its stake in May, reportedly at a 4.5% discount to
Blackstone's $31 IPO price. The purchase was partly intended to send a
goodwill message to Washington ahead of a visit to Congress by senior
Chinese leaders during the second Strategic Economic Dialogue there.

But Congress failed to be mollified by the purchase, and those
shares are now trading nearly 15% below China's price. That implies that
Beijing's paper losses stand at some $440 mln on its initial $3 bln
investment.

Veiled criticism levelled at the government in the domestic media
over the Blackstone deal has been just one more setback for what is
already proving to be a longer-than-expected journey to market for the
company.

Almost five months after the original announcement that China is to
establish a sovereign investment company, government ministries continue
to bicker over the terms of its establishment, the official suggested.

He said that the special treasury bonds to raise the initial
financing for the company were meant to have been sold during the first
half of this year. But those sales have been delayed by "many issues
requiring careful negotiation and coordination," the official said.

Nonetheless, the sale of the treasury bonds could begin by
mid-August, he said.

"(China) is getting more and more foreign exchange reserves.
Earlier would better than later," he said.

The market is currently awaiting the release of an initial batch of
the bonds, whose issuance is expected to total 1.55 trln yuan.

The bonds are being sold by the Ministry of Finance to raise money
to buy the equivalent in foreign exchange reserves from the People's
Bank of China.

The bonds are expected to assume at least some of the burden of
sterilization currently being shouldered by the central bank
through its biweekly open market operations.

The official suggested that another facet of the overhaul of
foreign exchange reserve management strategy -- the fate of Central
Huijin Investment -- is also being delayed by interministerial
disagreement.

Huijin was established by the PBOC in 2004 to hold the stakes of
the three of China's "big four" banks that were recapitalized between
2003 and 2005 at a cost of $60 bln in foreign exchange reserves. By law,
the PBOC is not allowed to own directly stakes in banks and financial
firms.

Huijin also holds stakes in other smaller banks and brokerages that
the government has taken over in recent years.

Government officials have confirmed that Huijin is to be folded
into the CIC, while domestic media reports have said that the PBOC will
receive 65 bln yuan in exchange.

"Sooner or later Huijin will be merged into CIC but it hasn't been
finalized yet and we need to do it step by step," the official said.

He added that 65 bln yuan is an unreasonable price for Huijin,
suggesting that the price should be higher.