China invests $3B in U.S. company -- Lower trade deficit

May 23, 2007

In an effort to reduce the U.S. China trade deficit, China announced a $3 billion investment in the U.S. Blackstone Group. This is one third of the $1 trillion fund China recently set up to invest its huge foreign currency reserves. It is also, coincidentally, the amount of money China has invested in U.S. Treasuries. (See Paulson to visit China, 3/7/07)

China is buying less than 10% of Blackstone, which means it will not have majority voting rights as a shareholder. It is doing this to placate U.S. government officials, who blocked the purchase of U.S. oil company Unocal by Chinese government-controlled CNOOC in 2005.

The announcement occurred a few days before Treasury Secretary Hank Paulson will meet with Chinese Vice-Premier Wu Yi in round two of the “Strategic Economic Dialogue.” (See background: Paulson meets Hu in China, 12/20/06) It may also be in response to a letter from the Senate Finance Committee that called on China to strengthen its currency, stop piracy, and resolve other trade disputes. (See background: U.S. tariff damages China relations, 4/4/07)  China also imposed10% tariffs on steel and metal products that will raise their prices on the global markets.

What a lower U.S. China trade deficit would mean:

This falls under the category of “be careful what you wish for.” A lower trade deficit can only come with a higher yuan and higher prices for Chinese goods. While this will make U.S. manufacturers and Congressmen happy, it will mean higher prices for you. Although it could also mean more jobs for U.S. workers, this will only help you if you are one of those workers.

Action steps:

Make sure you have commodities mutual funds in your retirement portfolio. Talk to your financial planner about the wisdom of including TIPS as a hedge against inflation.

Source: CNN Money, “China grabbing $3B of Blackstone,” 5/21/07, WSJ online, “China Adds Steel Duties to Curb Exports,”5/22/07

Related articles:

China's bank raised interest rates, 3/24/07

Sec'y Paulson at the G-7, 9/20/06

Read the World Money Watch Special Report, "Profit from China's Growth"

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