May 22 (Bloomberg) -- China is investing $3 billion in Blackstone Group LP to boost government coffers, and not as a bridgehead for overseas acquisitions or as a back door into private equity, the Chinese official managing the deal said.

``We're just looking for a better return,'' Jesse Wang, Chairman of China Jianyin Investment Ltd., the government agency managing the deal until a new state investment body is set up, said in an interview today. ``That's purely the company's financial investment, purely a commercial activity.''

New York-based buyout firm Blackstone increased its initial public offering by almost 20 percent to as much as $7.75 billion after China agreed to take part. The government is setting up the State Investment Co. to put more of its $1.2 trillion of foreign exchange reserves into higher-yielding overseas assets than the U.S. Treasuries that comprise much of its holdings.

``This is a bold move, and shows the new agency's primarily interested in increasing returns,'' said Stephen Green, senior economist at Standard Chartered Plc in Shanghai. Still the ``investment is only about two days' worth of forex inflows. The agency's willing to take a few punts at the margins -- into private equity, venture capital, hedge funds -- but the bulk of its investments will still be in more stable bets.''

State Investment Co. will buy a nonvoting stake of less than 10 percent, Blackstone said on May 20. The investment company will hold its Blackstone shares for at least four years and isn't allowed to take an equity stake in a competing private-equity firm for a year. Jianyin Investment will transfer the holding once State Investment Co. has been set up.

Asset Allocation

The investment agency is expected to be established this year and may park some of its money with other private-equity or fund managers, Wang said.

``When the company is established, it'll go through procedures to look at all possible private-equity, fund managers and other types of asset management,'' Wang said from Beijing. ``We assume a majority of the fund will be invested in portfolio management. However, there will probably a few direct investments.''

Blackstone, whose assets under management rose 12 percent to $88.4 billion in the past two months, is going public as the lowest borrowing costs in a decade have allowed LBO firms to take companies private at a record pace.

The firm's net income rose to $1.1 billion in the first quarter, more than twice the $487 million it earned a year earlier, and almost half the $2.3 billion earned in the whole of 2006. Each of the company's 770 employees produced an average of $2.95 million in net income, almost nine times the mean for Goldman Sachs Group Inc., Wall Street's most profitable firm.

`Stamp of Approval'

Blackstone in January hired former Hong Kong Financial Secretary Antony Leung to help it win deals in China, where it is lagging behind rivals including Carlyle Group.

The investment is like ``a stamp of approval'' for Blackstone when doing deals in the future and ``has to be helpful on many fronts, including overcoming the regulatory hurdles,'' said Steven Xi, a managing director of Hina Group Inc., a private equity fund in China. ``Without Chinese government cooperation and help, it has proven very difficult to do buyouts.''

Economic growth of more than 10 percent has intensified competition among private-equity firms for access to the market in China, where the government in September imposed stricter rules on overseas buyouts. The value of announced foreign acquisitions in China fell 11 percent to $27.5 billion in 2006, according to data compiled by Bloomberg.

Blackstone approached the Chinese government about investing in its IPO, Wang said. He denied that there was any intention to help the buyout firm gain access to the domestic market.

China Access

``I don't think we have any obligation to help Blackstone establish their network in China,'' he said. ``This is the explanation from the market place, it's not our explanation. If the American public investors like the China story, it will probably help Blackstone have a better IPO.''

The investment in Blackstone didn't preclude any future cooperation, he said.

The Blackstone deal is an ``opportunistic'' purchase, and doesn't necessarily signal the investment company's holdings will be more weighted towards private equity, said Adrian Foster, director of capital markets at Dresdner Kleinwort in Beijing.

Buying now will bring almost certain gains for the agency from Blackstone's IPO, Foster said. Blackstone can also offer more intangible benefits, such as specialist systems and market training, to China's new firm, he said.

Learning Curve

``This is not just about Blackstone going into China, this is about the Chinese government learning more about private equity in general,'' said Ludvig Nilsson, the managing partner of Jade Alternative Investment Advisors, a Shanghai-based investment management and advisory firm focusing on private equity investment in China.

Though the state investment company may benefit indirectly from Blackstone's successes in China, the agency will primarily be charged with buying overseas assets.

Different Agenda

``It's clear that this company is going to invest internationally,'' Wang said. ``We don't care about the domestic private equity development. That's some other people's concerns. The agenda is not ours.''

China does, however, recognize the political risks of buying stakes in overseas companies, said Standard Chartered's Green. ``This will allow them to do it through Blackstone and deflect some of that,'' he said.

Chinese oil company Cnooc Ltd. failed in a $18.5 billion bid for U.S. rival Unocal Corp. in 2005. U.S. lawmakers said a takeover by the Chinese company would infringe on U.S. national and economic security.

To contact the reporters on this story: Cathy Chan in Hong Kong at kchan14@bloomberg.net.

Last Updated: May 22, 2007 07:32 EDT