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
Good morning 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 off a bit in August and consumers are still spending like it’s 2019. Meanwhile, China’s property market could get dicey even for the most powerful of investors.

Edward White
There’s also this broader context at the moment in terms of Xi Jinping making these sweeping overhauls of China’s business and cultural landscape and property development and real estate could well be caught up in this.

Marc Filippino
I’m Marc Filippino. And here’s the news you need to start your day.

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Marc Filippino
Consumer prices in the US may be levelling off. That’s the key takeaway from the most recent Consumer Price Index report. In August, prices were up 5.3 per cent compared to last August. But more importantly, prices were only up 0.3 per cent from those in July. It means the Federal Reserve kind of gets to say, told you so.

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

Marc Filippino
That’s our US economics editor, Colby Smith.

Colby Smith
I think you’ve heard from Fed officials over the past couple of weeks that, you know, inflation is going to turn lower at some point. But they have acknowledged that, you know, it is at a bit more of an elevated pace. And I think anyone initially expected things like supply chains have really been constrained and stayed that way. And maybe even with the Delta variant, they’re getting worse to a certain extent. So I think there’s a broad-based understanding that an openness to the idea that inflation might be higher than anticipated. But I think these numbers confirm in a lot of ways that the pace of those price pressures has peaked to a certain extent.

Marc Filippino
And US consumers are still doing their part for the economy. They are spending big. In fact, their spending is still outpacing pre-pandemic levels. That’s according to bank executives at JPMorgan. Debit and credit card spending is 18 to 19 per cent higher than in 2019. It seems US shoppers are shrugging off concerns about the Delta variant and are continuing to fuel the economic recovery.

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Marc Filippino
The world’s largest private equity firm, Blackstone, said it was ending a multibillion dollar deal to buy a big Chinese property company. The company is called Soho China, and it was going to be the centre of Blackstone’s property empire in China until regulators in Beijing said they wouldn’t approve the deal within the agreed timeframe. Here’s the FT’s Ed White.

Edward White
It was a real surprise. This was a planned three billion dollar commercial property deal by one of the world’s biggest real estate managers. It’s not exactly normal for the likes of Blackstone to push something to this point and then have it rebuffed. And important context here is that Stephen Schwarzman, the co-founder and chief executive of Blackstone, he’s been spearheading an expansion of a vast property portfolio in China. This has grown to be across more than 20 cities. It includes a 1.1 billion dollar acquisition earlier this year of a massive urban logistics park close to Guangzhou. And so the Soho deal was going to be the centrepiece of this empire, particularly given the company’s holdings across very prime real estate in China’s top cities in in Shanghai and in Beijing. And this also came after Stephen Schwarzman spent years laying the groundwork for, you know, for this expansion in China. He had been courting the political elite. He had even pledged 100 million dollars to an international education programme at one of Beijing’s top universities. So certainly a blow after all of that effort.

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

Edward White
On the one hand, it is a very big setback given Soho was really gonna be a prized acquisition for Blackstone. You go back to June when the deal was announced and Blackstone was saying that it was thrilled with the deal that reinforced its commitment to investing in China. Now, on the other hand, you have to ask whether this would have actually been such a good moment to be investing in Chinese real estate. As we speak, questions are mounting over the debts and potential liquidity problems at Evergrande. This is China’s biggest real estate group. And there are real serious fears of a contagion risk spilling through the economy in China and particularly in the real estate market if things go bust with Evergrande. There’s also this broader context at the moment in terms of Xi Jinping, the China’s Chinese president, making these sweeping overhauls of China’s business and cultural landscape. And while this has so far been far more acutely felt and focused on areas like technology and education, it is quickly snowballing to lots of other areas. And so property development and real estate could well be caught up in this.

Marc Filippino
Now could this have any unintended consequences for Beijing?

Edward White
I think with a deal of this scale, the short answer has to be yes. Any surprise regulatory decision, especially something involving a non-sensitive area like high-end property. So it’s not not computer chips, it’s not defence. And this sort of thing is surprising and it just creates new levels of uncertainty over investing in China. So there is that potential hit to sentiment. But of course, this does come at this time of really sweeping 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 is such a good bet. And so it does create questions over what will Blackstone’s next move be in China. and that is something that I think Beijing may see unintended consequences if this adds to that broader uncertainty and it starts to spook other investors or other developers over future investments in China.

Marc Filippino
Now, as Ed just mentioned, Blackstone’s decision to abandon that big property deal comes as China’s president Xi Jinping is engaged in a sweeping overhaul of the country’s business landscape, and that includes property. Xi is on a populist mission to lower the cost of housing, especially since prices shot up during the pandemic. Here’s the FT’s Sun Yu.

Sun Yu
The authority believed that rising land prices are one of the main drivers of the real estate bubble. So they are very keen to keep land prices down, which is why the central government ordered local authorities to take any measure that’s necessary to control land prices.

Marc Filippino
Now, earlier this year, Beijing set new rules for the land auctions. Local governments regularly sell land to property developers, but central government officials told them to limit the number of auctions. The idea being that more land sold at fewer auctions would give a sense of more supply, thereby lowering prices. It didn’t work. Some cities suspended auctions. Other auctions are higher prices, and Beijing’s plan to lower prices put local governments in a tight spot.

Sun Yu
Most Chinese local authorities, they they rely on land sales revenue to do everything from paying teacher’s wage, to building roads and bridges, to launching poverty alleviation programmes. And now, given the fact that they won’t have so much revenue from selling land, they’ll be facing a cash crunch. Plus, these local authorities have already borrowed so much that many of them are sort of stretched to pay off their existing debt, which is why now local authorities are very worried about this. But there is nothing they can do about this, given the fact that President Xi Jinping is such a powerful leader. And China these days, China has become much more centralised than it ever was before.

Marc Filippino
That’s our China economics correspondent, Sun Yu.

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Marc Filippino
Before we go, let’s take a quick look at the out of home advertising industry, otherwise known as billboards. Yep, you guessed it. It’s also been affected by the pandemic. Fewer people in the office meant fewer people driving to work and by roadside signs. So companies slashed their budgets for billboards and outdoor posters. Sales are recovering along with commuter traffic, at least in places where lockdowns have been lifted. But they’re still lower than compared to pre-Covid days. And there’s still advertising on public transit, though it’s for different products these days. One ad industry executive said soap and disinfectant companies are happy to advertise on trains and buses, places where riders might be nervous about germs.

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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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