It is always difficult to separate money from politics. More so in the case of a still underdeveloped China that is facing the malaise of the rich: what to do with $ 1 trillion in foreign exchange reserves that are rising by an astounding $1 billion a day.
Buying American debt is one way of utilising the money well, but with the dollar on a downward trajectory, it probably makes sense to diversify the portfolio and look at global equity markets for higher returns. That's what China did last month when it announced it would take a $ 3 billion stake in the Blackstone Group, an American private equity fund - and we have become a part of China's new financial game as Blackstone has also invested in India.
For die-hard China watchers in India - fed on decades of mistrust over a festering border dispute and Beijing's big power ambitions - this would be looked upon as a backdoor entry into the Indian economy. But at a time when bilateral trade between the two neighbours has risen sharply, this argument might not hold much water. According to Xinhua, trade between India and China surged to nearly $25 billion in 2006, making Beijing India's second-biggest trade partner. Currently, India is China's 10th largest trade partner.
For China, investment in Blackstone is an astute political and business move. For India to complain, if it does, would be a bad idea. In a globalised world, there is little to choose between free markets and controlled economies. Halfway measures seldom work, and China is only doing what any other country would if it needed to grow its money.
The Chinese fine-tuned the politics of money long before we even became comfortable talking about it. Beijing never shied away from using its growing financial muscle, be it in Africa, the Pacific islands, South America, or among our neighbours. A stadium here, a port there, an oil pipeline somewhere, have all helped China build good relations with smaller and sometimes pariah governments across the world. It began with efforts to wean countries away from Taiwan. China considers Taiwan a breakaway province and actively discourages governments to have relations with the island.
Its deal with Blackstone is just another example of China's ability to swiftly change course for its own benefit, as is its decision to set up a new state investment agency on the lines of Singapore's Temasek Holdings.
China's state investment agency is expected to manage up to $ 200 billion. The deal is beneficial to both China and Blackstone. While Beijing gets its toe into the booming global equity markets, Blackstone gets a big foot into the Chinese market. China's non-voting stake of fewer than 10 per cent would keep it out of sight of a US government keen to scrutinise its activities.
The Blackstone Group formally completed its $4.1 billion initial public offering - one of the biggest in the US - and the stake sale to the Chinese government last month. Last week, Blackstone bought Hilton. Next time you check into one, remember: China owns a part of the room you sleep in. China's previous attempts to buy US industrial assets, including oil company Unocal, ran into trouble as Americans raised the nationalist bogey, halting the deals. Similarly, in India, there have been walls that Chinese companies say keep coming up against them.
A stake in a private equity firm that buys companies and sells them for profit after restructuring them not only offers a high-risk, but a high-return investment opportunity for China. It is also one that does not attract attention. That seems to be happening in India's case. A Chinese state investment agency buying into an American private equity fund that invests in the Indian market may not necessarily raise political questions.
But let's look at Blackstone in India, where the group has been active since 2005. The group's close-ended India Fund has put in close to $ 2 billion in equity of large Indian companies. It has also directly invested $ 50 million in the Pune-based Emcure Pharma and $ 275 million in the Hyderabad-based Ushodaya Enterprises, which owns a newspaper.
From India's point of view, China's decision to buy into Blackstone could also be seen as coming at a critical point when Indo-US ties are strengthening and the two countries are negotiating the final blueprint of a landmark nuclear deal. There is a strong feeling that China's stand on the disputed border has become aggressive of late mainly due to India's growing closeness to the US, which is expected to become a major arms supplier to New Delhi in the not-too-distant future.
Some prickly diplomatic instances have only added to the tension between the two Asian neighbours. For one, China denied a visa to an IAS officer from Arunachal Pradesh, who was part of a team of Indian government officers due to travel to China. Then when India cancelled the visit of the 107 officers, China said bilateral differences could only be discussed after a fair and reasonable settlement of the boundary issue.
China considers Arunachal Pradesh - part of the border dispute that took centrestage in bilateral ties after the 1962 war - as its own. And its ambassador to New Delhi created a diplomatic crisis just ahead of a visit by Chinese President Hu Jintao last year when he said Arunachal was Chinese territory. According to India, China is in illegal occupation of 43,180 sq km of Jammu and Kashmir. China, on the other hand, accuses India of holding about 90,000 sq km of its territory, mostly in Arunachal Pradesh.
While diplomacy has been prickly and slow moving, trade has galloped. And it is precisely this business of money that sits well with the Chinese plan to buy into Blackstone. China probably bought into Blackstone seeking larger profits for its foreign exchange horde, but India may have questions. Is this part of China's policy to dip into the Indian economy at a time when the overall trade balance is in India's favour? Given the Chinese leadership's penchant for baby steps - but long-term strategic thinking - on critical issues, there is a distinct possibility that Beijing's decision to buy into the world's second-biggest private equity firm was triggered partly by its intention to keep its neighbour in check.
Should we, however, be worrying about a deal that some would say is just another financial transaction in an interconnected world? If we raise concerns about China, then what about other countries? Aren't many US funds and companies also invested in India?
In a globalised world, it is extremely difficult to curtail the flow of money. It takes a different shape every minute, comes in from different directions and almost never stops moving. The sceptics would want to identify Chinese money and stop it at our borders. But is that possible when everything from idols of Indian gods to silk saris come freely to India from China? At a purely economic level, we have learnt to live with each other. Politically, however, we still distrust Beijing. That, to my mind, may worsen if we are unable to learn to look pragmatically at financial deals struck thousands of miles away.