For those of you that think business circulates in your little niche and the world’s news does not bear fortune nor failure, you’re likely right. For those of you that are intrigued by the world of private equity and the affect it’s been having on business in the United States and abroad, read on. For those of you that have absolutely no comprehension of what I just said, please leave.

Some very interesting news broke today: China is making a $3bb investment in Blackstone, for a just-under 10% stake in the one of the most politically influential investment funds in the United States.

Here are some facts:

* China recently announced that it is forming the State Investment Co., with assets that may reach $300bb.

* China announced that it is diversifying its dollar based investments beyond U.S. Treasuries.

* Private Equity firms like Kohlberg Kravis have said that they are concerned with investment in China because of political risk (such as China’s unwillingness to allow foreign control of domestic businesses, information flow, etc…).

* The U.S. environment is becoming increasingly risky for private equity firms, as politicians are bringing Private Equity & Hedge Funds under increased scrutiny (due to the fear of the unknown, and the tax consequences of private equity).

* The 2006 U.S. China trade deficit set a record of $233bb.

* Carlyle, another private equity firm, recently had troubles when trying to take a majority stake in a company in China.

* Steve Shwarzman is the former dorm mate of President Bush, and has significant political connections.

Translation:

There are tremendous inflows moving into China today. Not just from the U.S., but from other parts of the world as well. When somebody buys goods from China, they must pay in Yuan. This means that there is demand to buy Yuan and sell Dollars. This also means that there is demand to increase the value of the Yuan and decrease the value of the Dollar. If a dramatic move were to occur, it would cool the Chinese economy and most likely send it into a severe depression.

Instead, China is going to handle this via its own method. It’s going to continue to buy U.S. Treasuries to reverse this natural process. However, it needs to diversify into other channels to control the dollar.

What does it do?

It picks a politically connected channel, ala Blackstone, and takes a majority investment in a U.S. denominated security. It pays with dollars and it does a few things. It tries to allay the fears that have arisen with the announcement of the $300bb super-fund, it finds an invesment that will likely achieve greater returns than U.S. Treasuries, and it allows a private equity fund to take majority control in a state-owned enterprise (I’m calling this one now).

What really happens?

1. Politicians become even more circumspect and they continue to raise the decibel level of their mantra that China MUST devalue its currency (with the structural changes in our economy, that boat has already floated). In fact, we’ll now have greater scrutiny regarding private equity and hedge funds.

2. The diversification strategy for Chinese dollar investments eventually backfires because Blackstone makes some tremendous purchases in China (buying Yuan and selling dollars).

3. American business does not feel the brunt of this because there is now an increased likelihood that the U.S. will institute laws barring a communist country from making a direct investment in a U.S. firm.

4. India continues to be overlooked as the huge success story that it is. After all, political intrigue plays a heck of a lot better than a sedate and friendly rise of one of the fastest-growing and soon-to-be-most-powerful economies in the world!

5. The average American continues to argue that ignorance is bliss…