China's great leap into private equity
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Last week, the People’s Bank of the People’s Republic of China told the Chinese people that thenceforth it wouldn’t be quite so free and easy with The People’s money. Having previously told the people that it was glorious to get rich, they might have warned the people that getting rich without working is not always as easy as it looks. But they let the opportunity pass without mentioning it.
The Middle Kingdom is an old place. But it’s fairly new to the ways of modern market capitalism. In fact, the ways of modern market capitalism, circa 2007, are new to us all. No man alive has ever seen quite this level of happy delirium. Still, the Chinese, who’ve never seen a market crash up close, or a real bear market, or a depression that wasn’t caused by their own politicians, are especially guileless – and easy targets. Widows and orphans line up at brokerages to open day-trading accounts: 300,000 new accounts are opened every day. Although Shanghai stocks are up 180% in the last 19 months, they’re still buying. Trading volume was recently clocked at ten times the rate of six months ago.
When the announcement of tighter bank reserve requirements came out, the people greeted it with alarm. Chinese stocks sold off. Then, a few days later, investors recovered from their brush with sanity and bid up stocks to a new record high. Asia’s richest and shrewdest investor, Li Ka-shing, concludes: “[this] must be a bubble”. But let The People have their illusions. The Chinese leadership has a folie of its own. China is buying a giant piece of a giant bubble – shares in the private-equity giant, Blackstone. Blackstone is in the business of making deals and clearly has the wind at its back. The lenders from whom it borrows, and the public from whom it buys and to whom it sells, act more like patsies than counterparties. Japan and Switzerland lend at almost zero interest – then investors take the finished product back at top dollar. And the deals are coming fast and furious. In the US, new securities issues rose 13% in the first quarter – led by mergers and acquisitions, which were up 23.6% on the year before. Total equity underwriting rose 42.6% over the first quarter of 2006. And now, here comes the investor with the largest cash pile in the entire world – China – into the private equity market.
And here we pause to draw breath. We have before us a group of unreformed Marxists buying shares in what must be capitalism’s most capitalistic institution. What does it mean, we are tempted to ask? We don’t know, but we think we hear the deep laugh of the gods. “The capitalists will sell us the rope we use to hang them,” predicted Lenin. But it wasn’t that simple. Instead, the Chinese sold the rest of the world – particularly Americans – trinkets and gadgets, taking America’s paper money in exchange. Now, the government of Mao and Zhou has about $1trn on hand. What can it do with that kind of money? It is not buying rope, but assets. The communists won’t hang the capitalists at all. They will merely replace them, becoming rentiers themselves by giving back their dollars in payment for America’s remaining factories, brands, resources, and companies. And then, maybe they’ll let the previous owners shine their shoes and do their laundry.
But even more interesting than the practical effects of this move is the theory behind it. Democracy, Communism, and Modern Portfolio Theory all rest on the same fraud – that The People are geniuses and saints. All the theories agree – there is no higher source of wisdom, virtue, or pricing than the will of the heaving masses. If the voters want to do something foolish – who can tell them not to? And if stock buyers put a price of $40 on Blackstone shares, no other price really counts. What is remarkable is that every punter knows it’s not true. Every one of them tries to make money by taking advantage of the masses’ imbecilities. When an investor buys a stock, he believes he sees something in it that the hoards of other investors have missed. Every bet he makes says: ‘I’m smarter than the whole lot of you’.
Blackstone’s business, too, rests on the presumption that The People have erred. The company pretends to ‘add value’ by finding a company that The People have mispriced. Blackstone buys it, then reorganises it, borrows against it, and pays itself millions in fees. After this shake up, when the company finally comes to rest in The Peoples’ own brokerage accounts again, it is presumed to be a more valuable enterprise.
Hard to believe. Is there any asset or investor left on this whole sorry ball
that has not already been shaken up – and now trembles with money lust?
Is there a leaf left anywhere on the planet that does not flutter in the hope of turning to gold?
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This genius investor does dizzying levels of research to uncover...Half Price Shares!
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