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. Last Updated: 07/27/2016

China Takes a Hit as Blackstone Falls

HONG KONG -- The first purchase by the Chinese government's new overseas investment fund, a $3 billion stake in the Blackstone Group, has produced an unusual public reaction within China.

Since Blackstone went public on June 22, the company's shares have fallen steeply, pushing down the value of the Chinese government's investment by more than $425 million in just six weeks.

Chinese bloggers, and even some financial media, have not taken the hammering lying down. They are assiduously tracking the dwindling value of the government stake, and some bloggers and postings in Internet chat rooms are bitterly questioning Beijing's stock judgment -- often in particularly Chinese terms.

"O senior officials of the Chinese government, please do not be fooled by sweet-talking wolves dressed in human skin," said one of scathing Internet postings compiled by blogger on Sina.com, a Chinese web site. "The foreign reserves are the product of the sweat and blood of the people, please invest them with care!"

In a sign that the Chinese government may be less comfortable with the marketplace of ideas than they are with the stock market, the blogger's entry was visible on the web site on Thursday afternoon, but had disappeared by nighttime. But milder criticisms of the Blackstone investment by others could still be found.

Foreign investments are particularly tricky for the Chinese government because of the public's virulent nationalism born of centuries of foreign invasions and occupations.

Over the last several years, the People's Bank of China has led the way among central banks in buying U.S. mortgage-backed securities, accumulating an estimated $100 billion worth, according to people familiar with the central bank's trading. The People's Bank of China has reportedly chosen some of the most creditworthy tranches of these securities.

But with the current malaise in the U.S. housing market, even the value of some mortgage investments that once seemed conservative is starting to erode.

China's loss of appetite for mortgage-backed securities, and its indigestion from the Blackstone deal, does not mean that China has lost interest in overseas investments, of course. The China Development Bank, a state-owned institution, agreed last week to invest 2.2 billion euros ($3 billion) in Barclays, the British bank, and to invest an additional 7.6 billion euros if Barclays wins the bidding for ABN Amro.

With China running a trade surplus that hit $26.91 billion in June, the central bank is issuing torrents of yuan and frantically buying dollars and other currencies -- to prevent the yuan from rising against the dollar. But the government's huge purchases of foreign currency have created another problem: what to do with the money.

Beijing's latest solution is to begin creating a so-called sovereign wealth fund: a government-owned investment company that will issue $200 billion worth of yuan-denominated bonds in China and use the proceeds to buy dollars for overseas acquisitions and other investments. Although the company has not been legally chartered yet, the Blackstone acquisition was made on its behalf by another government entity.