June 6 (Bloomberg) -- Stephen Schwarzman, founder of the world’s biggest private-equity firm, said U.S. President Barack Obama’s engagement with China’s new government is laying the groundwork for improved economic and military ties between the two nations.
There’s “a recognition that the two countries have to be in a different type of zone, given the long-term relationship,” Schwarzman, an outspoken critic of Obama throughout his first term, said in an interview in his New York office days before a summit between Obama and China’s President Xi Jinping.
“I could foresee a period of much more productive engagement between these two countries,” Schwarzman said.
The billionaire chief executive officer of Blackstone Group LP announced last month that he’s establishing a $300 million initiative for students to spend a year and earn a master’s degree at China’s Tsinghua University. The endowment, called the Schwarzman Scholars program, is modeled after the Rhodes Scholarships established in 1902 by Cecil J. Rhodes at the University of Oxford to facilitate better understanding between the U.S. and Europe.
“There’s been a major change with the new government in China,” Schwarzman said, whose company has offices in with offices in Shanghai, Hong Kong and Beijing. “They realize things there have to change from their economic model of export to develop more of their own economy internally, to other types of issues from the environment and pollution to health care.”
Obama and Xi are set to meet June 7-8 in Rancho Mirage, California. Resetting the relationship between the world’s biggest economies “won’t happen in one meeting over two days, but that type of interpersonal chemistry, particularly as I find dealing in Asia as I have for over 30 years myself, is -- is a very important thing,” Schwarzman said.
Schwarzman, who backed Republican Mitt Romney in last year’s election, cited China’s recent posture toward North Korea as evidence that the U.S. has made progress with China. Xi last month urged North Korea to return to six-nation talks aimed at getting North Korea to abandon its pursuit of nuclear weapons. The move came shortly after Xi met in Beijing with U.S. Secretary of State John Kerry, who said China was “very serious” about trying to bring North Korea into line.
It was the first time that China was taking a visible hard stance with North Korea, “in large part because it was China’s interests and the U.S. interests to not have any type of really serious accident that happened from North Korea,” Schwarzman said. “It was a great opening” for Obama’s second term dealings with China, he said.
Still, friction between the two countries is expected and needs to be addressed, Schwarzman said, citing China’s economic growth and cyberthreats. The Obama administration has accused China of widespread hacking into U.S. government and corporate computer systems. This weekend’s summit -- the first since Xi took office -- offers a chance to air those and other contentious matters even if little is settled.
China’s economy has grown more than fourfold in the past decade, overtaking Japan as the world’s second-largest economy and becoming the No. 2 trading partner for the U.S. As economic ties have grown, so have tensions over computer hacking, human rights and access for U.S. companies to China’s market.
Tensions stem in part from their different views of China itself, Schwarzman said. While the U.S. views China as booming, China’s “self-image” remains that of a poor country, he said. So when Western powers ask China’s leaders to do “certain things, their default position is, why don’t you be objective? We’re a poor country. You can’t ask us to do this.”
The Schwarzman Scholars program will feature studies at a university in Beijing that’s the alma mater of senior Chinese officials including Xi. The endowment will support 200 students annually, with the first group slated for 2016.
“China’s now a core curriculum for students from the West, and not just in an academic sense,” Schwarzman said. “To not understand what’s going on with the country that will at some point in the next several decades most probably be the largest economy in the world is really not a practical position.”
China ranks second only to Canada among the biggest U.S. trading partners, with two-way trade last year reaching $536.2 billion, and the deficit on the U.S. side at $315 billion in 2012, more than any other nation.
While the communist nation had average economic growth of 10.6 percent in the 10 years through 2011 and 7.8 percent last year, it continues to restrict U.S. producers of autos, steel and beef from gaining access to its markets.
Schwarzman, 66, who ranks 159th on the Bloomberg Billionaires Index with an estimated net worth of $7.5 billion, founded New York-based Blackstone in 1985 with Peter G. Peterson. China Investment Corp., the country’s sovereign wealth fund, paid $3 billion for a 9.4 percent stake in Blackstone at the time of the company’s initial public offering in June 2007.
Schwarzman predicted that China will eventually open its markets and have more robust ties with the rest of the world.
“China’s got a ways to go in terms of opening their economy and it’s purposely not open,” he said. “Their currency is not convertible. There are restrictions on a variety of industries going into China, percentage ownerships. Some of that is - goes along with being a developing country.”
Obama and Xi are meeting at the 200-acre Walter and Leonore Annenberg estate near Palm Springs instead of the White House. Xi, then vice president, met with Obama in Washington last year. The U.S. president held 12 face-to-face meetings with Xi’s predecessor, Hu Jintao, over the last four years.
Schwarzman said having the meeting outside the U.S. capital was “a very good idea” that could yield more productive talks.
“President Xi’s coming all the way to America, but he’s not going to Washington,” Schwarzman said. Instead, he’s “stopping off in California where a lot of people like the weather and the lifestyle. And President Obama is flying from Washington there to have two days of informal talks, as opposed to the strict protocol-based type of thing that you’d have.”
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