China deals a blow to Blackstone’s ambitions

This is an audio transcript of the FT News Briefing podcast episode: China deals a blow to Blackstone’s ambitions

Marc Filippino
Hello from the Financial Times. Today is Wednesday September 15th. And this is your FT News Briefing.

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Marc Filippino
US inflation cooled a bit in August and consumers are still spending as they were in 2019. Meanwhile, the Chinese real estate market could become risky, even for the most powerful investors.

Edouard Blanc
There is also this larger context right now in terms of Xi Jinping making these sweeping overhauls of China’s business and cultural landscape and real estate and property development may well be caught in that.

Marc Filippino
I am Marc Filippino. And here is the news you need to start your day.

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Marc Filippino
Consumer prices in the United States could stabilize. This is the takeaway from the most recent Consumer Price Index report. In August, prices were up 5.3% from last August. But more importantly, prices were only up 0.3% from those in July. That means the Federal Reserve can sort of tell it, told you so.

Colby Smith
I think, in many ways, this helps to confirm the Fed’s view that inflation is sort of a transitory phenomenon.

Marc Filippino
This is our American economic editor, Colby Smith.

Colby Smith
I think Fed officials have told you over the last couple of weeks that, you know, inflation is going to come down at some point. But they recognized that, you know, it’s at a little higher rate. And I think everyone initially expected things like supply chains to be really limited and to stay that way. And maybe even with the Delta variant, they get worse to some extent. So I think there is a general understanding that there is an openness to the idea that inflation could be higher than expected. But I think these numbers confirm in many ways that the pace of these price pressures has peaked to some extent.

Marc Filippino
And American consumers continue to do their part for the economy. They spend big. In fact, their spending still exceeds pre-pandemic levels. This is according to the executives of the JPMorgan bank. Debit and credit card spending is 18-19% higher than in 2019. It appears US buyers are ignoring concerns about the Delta variant and continue to fuel the economic recovery.

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Marc Filippino
The world’s largest private equity firm, Blackstone, has announced that it is ending a multibillion-dollar deal to buy a major Chinese real estate company. The company is called Soho China, and it was going to be the center of Blackstone’s real estate empire in China until regulators in Beijing say they would not approve the deal within the agreed timeframe. This is Ed White from FT.

Edouard Blanc
It was a real surprise. It was a $ 3 billion commercial real estate transaction by one of the world’s largest property managers. It’s not entirely normal for people like Blackstone to push something to this point and then push it back. And the important context here is that Stephen Schwarzman, co-founder and managing director of Blackstone, has spearheaded the expansion of a large real estate portfolio in China. It has spread to more than 20 cities. It includes a $ 1.1 billion acquisition earlier this year of a huge urban logistics park near Guangzhou. And so the Soho deal was going to be the centerpiece of that empire, especially given the company’s holdings in prime real estate in major Chinese cities of Shanghai and Beijing. And it also happened after Stephen Schwarzman spent years setting the stage for, you know, this expansion into China. He courted the political elite. He even pledged $ 100 million to an international education program at one of Beijing’s top universities. So certainly a blow after all these efforts.

Marc Filippino
Ed, how much of a setback does this represent for Blackstone’s investments in the region?

Edouard Blanc
On the one hand, this is a very big setback considering Soho was really going to be a valuable acquisition for Blackstone. You go back to June, when the deal was announced and Blackstone was saying he was thrilled with the deal that strengthened his commitment to invest in China. Now, on the other hand, you must be wondering if this would have been such a good time to invest in Chinese real estate. As we speak, there are more and more questions about Evergrande’s debt and potential liquidity issues. It is the largest real estate group in China. And there are real, serious fears of a risk of contagion spreading through the economy in China and in particular the real estate market if things go wrong with Evergrande. There is also this larger context right now in terms of Xi Jinping, the Chinese president of China, who is making these drastic reshuffles of China’s business and cultural landscape. And while it has so far been much more felt and focused on areas like technology and education, it is quickly snowballing in many other areas. And so, real estate development and real estate could well get caught up in this business.

Marc Filippino
Could this have unintended consequences for Beijing?

Edouard Blanc
I think with a deal of this magnitude, the short answer has to be yes. Any surprise regulatory decision, especially something involving a non-sensitive area like high-end real estate. So they are not computer chips, they are not defense. And this sort of thing is surprising and it only creates new levels of uncertainty about investing in China. So there is a potential impact on sentiment. But of course, it comes in this time of really radical overhauls and sweeping regulatory changes and sentiment around China. And so there is this real divide emerging on Wall Street over whether Chinese companies and the Chinese economy are such a good bet. And so that creates questions about what will be Blackstone’s next move in China. and this is something that I think Beijing may see as unintended consequences if it adds to that larger uncertainty and starts scaring other investors or developers about future investments in China.

Marc Filippino
Now, as Ed just mentioned, Blackstone’s decision to drop this big real estate deal comes as Chinese President Xi Jinping is embarked on a major overhaul of the country’s business landscape, including real estate. Xi is on a populist mission to lower the cost of housing, especially as prices have skyrocketed during the pandemic. This is Sun Yu from FT.

Sun Yu
The authority considered that the rise in land prices is one of the main drivers of the real estate bubble. They are therefore very keen to keep land prices low, which is why the central government has ordered local authorities to take all necessary measures to control land prices.

Marc Filippino
Today, earlier this year, Beijing established new rules for land auctions. Local governments regularly sell land to property developers, but central government officials have told them to limit the number of auctions. The idea being that more land sold at less auction would give the impression of a larger offer, thus lowering prices. It did not work. Some cities have suspended the auction. Further auctions are higher prices, and Beijing’s plan to lower prices puts local governments in a difficult position.

Sun Yu
Most Chinese local authorities depend on income from land sales to do everything from paying teachers’ salaries to building roads and bridges to launching poverty reduction programs. And now, since they will not have as much income from the sale of land, they will face a shortage of cash. Moreover, these local authorities have already borrowed so much that many of them are sort of running out of steam to pay off their existing debt, which is why the local authorities are now very worried about it. But there is nothing they can do about it, given that President Xi Jinping is such a powerful leader. And China these days, China has become much more centralized than it ever was.

Marc Filippino
He is our economic correspondent in China, Sun Yu.

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Marc Filippino
Before we go, let’s take a quick look at the outdoor advertising industry, also known as billboards. Yes, you guessed it. He was also affected by the pandemic. Fewer people in the office meant fewer people driving to work and through road signs. Companies have therefore reduced their budgets for billboards and outdoor posters. Sales are picking up with commuter traffic, at least in places where blockages have been lifted. But they are still lower than before Covid. And there is always advertising on public transport, even if it is for different products these days. An advertising industry official said soap and sanitizer companies are happy to advertise on trains and buses, places where passengers might be nervous about germs.

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Marc Filippino
You can read more about all of these stories at FT.com. This has been your daily FT News briefing. Make sure to come back tomorrow for the latest business news.

This transcript was generated automatically. If by any chance there is an error, please send the details for correction to: [email protected]. We will do our best to make the change as soon as possible.

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