Sept. 7 (Bloomberg) -- Blackstone Group LP, manager of the world's biggest buyout fund, will purchase about 18 percent of specialty chemical maker China National BlueStar Group Corp. for $500 million, said two people with direct knowledge of the plan.

BlueStar's parent will sign the deal with New York-based Blackstone on Sept. 10, said the people, who declined to be identified before an announcement. BlueStar's chemicals are used in electronics, cellular-phone keypads and car parts.

Blackstone is making its first investment in China, nine months after hiring former Hong Kong Financial Secretary Antony Leung to help narrow the gap with Carlyle Group and Warburg Pincus LLC in the country. Leung helped the firm broker two deals in China, including the sale of a 9.4 percent stake in itself to the government and a $3 billion purchase of Barclays Plc shares by China Development Bank.

``The company is a rising star in China, especially after it developed links with the Chinese government,'' said Shi Xuesong, a Shanghai-based analyst at China International Capital Corp.

The planned investment by Blackstone in BlueStar was reported yesterday by London's Daily Telegraph.

Blackstone has an option to increase its stake in state- owned BlueStar to 20 percent should the company meet profit targets next year, the people said. China National Chemical Corp. will remain the biggest shareholder.

John Ford, a New York-based spokesman at Blackstone, and Xi Yuxin, a Beijing-based spokeswoman at China BlueStar, declined to comment.

French Expansion

BlueStar bought Drakkar Holdings SA, the parent company of a French maker of animal-nutrition products, for $460 million from CVC Capital Partners Ltd. in 2005. Last year it purchased a silicone unit of Rhodia SA, France's largest maker of specialty chemicals, for an undisclosed price.

``With Blackstone's overseas network, BlueStar will be able to better integrate its business in France and eventually group the assets for a listing,'' Shi said.

The buyout firm plans to seek an initial public offering of BlueStar in Shanghai or Hong Kong by the end of 2008 at the earliest, the people said.

Blackstone still needs approval for the acquisition from Chinese regulators, the people said. That may be complicated after China introduced stricter rules on overseas takeovers a year ago, barring purchases of companies that are deemed ``strategic'' or that have well-known local brands.

Custom Chemicals

Carlyle, based in Washington, was forced to scale back a planned investment in Xugong Group Construction Machinery Co. this year. New York-based Goldman Sachs Group Inc.'s plan to buy 10.7 percent of China's Guangdong Midea Electric Appliances Co. was blocked last week.

Blackstone, founded by Stephen Schwarzman and Peter G. Peterson, raised $4.13 billion in an initial public offering in June. Before the IPO, the company sold $3 billion of non-voting shares to China, which is setting up a $200 billion fund to boost returns from its foreign currency reserves.

The firm's shares have dropped 37 percent since they began trading on June 22 in New York.

Blackstone also advised China Development Bank on its 2.2 billion euro ($3 billion) investment in Barclays, the third- biggest U.K. bank, in July. The Chinese firm will invest a further 7.6 billion euros if the London-based bank's bid to buy ABN Amro Holding NV succeeds.

BlueStar's ``specialty chemical markets'' are especially lucrative because they're designed for specific customers and carry higher profit margins, said Samuel Liew, a Singapore-based consultant at Chemical Market Associates Inc.

Strong Market

``China is a strong market for petrochemical and finished- good products, so for a company positioned in China, there's room for growth,'' Liew said. BlueStar also specializes in cleaning products and water treatment.

The price for global chemicals will rise to $187.50 a metric ton by 2015 from $137.50 a ton by the end of this year, according to estimates from Chemicals Market Association Inc. China's economy grew 11.9 percent in the second quarter, the fastest pace in 12 years, boosting consumption and demand for chemicals across various product lines.

BlueStar originally planned to raise about $300 million in a Hong Kong IPO, bankers familiar with the plan said last year.

BlueStar has three publicly traded Chinese units: BlueStar Cleaning Co., Shenyang Chemical Industry Co. and Blue Star New Chemical Material Co.

All three announced stock suspensions in separate filings to the Shanghai and Shenzhen stock exchanges yesterday, saying their parent is in talks with a ``relevant party'' on a ``major issue.''

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

Last Updated: September 7, 2007 07:29 EDT