The Kennel

China's 10% Stake In Blackstone Group: Should We Start To Worry?

We agree that securing commodity supplies is indeed a major strategic motivation for the Chinese government, presiding over the biggest buildout in human history. But there is also a strong tactical incentive for them to convert as much as possible of their huge hoard of dollars into tangible assets before the greenback's inevitable demise.

This is a complex and fascinating balancing act, because at this point it is still in the interest of the Celestial Kingdom to leverage the addiction of the US consumer for cheap goods to continue to nurture their own industry, and buying more time for the growing Chinese middle class to step up to the plate consumption-wise. To that end, they still need to prop up our spendthrift ways by financing our debt, which means they must continue to buy dollars. Not to mention the fact that buying dollars maintains their value - or, at least, slows the decline - and affords them more time to convert dollars into something with real value.

Once the consumption capacity of domestic Chinese approaches that of the US - which could happen sooner than we might otherwise expect should there be a precipitous decline in US consumer spending - then the game will be up.

The takeaway here is that in the interim, in order to get the most for their dollars, we could see Chinese investments moving outside the commodity sector. Florida beachfront property may be overvalued here given the probable coming decline in US economic fortunes and rising sea levels, but if you are paying with dollars that will manifestly be worth drastically less in a few years and you can't otherwise get rid of, it starts to look good at any price.


Brad Hessel
Manager, The Kennel