The Chinese Government today agreed to buy a $3 billion (£1.5 billion) stake in the US private equity firm Blackstone and could hand it part of a $200 billion fund which China has earmarked for overseas investments.

Blackstone announced the deal at the same time as revealing that it would raise up to another $4.75 billion in its public flotation, giving it a $7.75 billion target. It said in an official filing that it would sell 133.3 million common units at $29 to $31 each, for proceeds of $3.87 billion to $4.13 billion.

The IPO may grow to $4.75 billion if another 20 million units are sold to meet demand.

According to Dealogic the float would be the largest by a private equity firm. It could value Blackstone at $33.6 billion, based on an equivalent 1.085 billion units outstanding after the offerings, Dealogic said.

Blackstone said the Chinese had agreed to take a non-voting stake and would have a 4.5 per cent discount on the public offer price when Blackstone is floated.

China has also agreed to sell down its stake if it comes above 10 per cent following the flotation and it will hold on to it for at least four years.

Stephen Schwarzman, chairman, chief executive and co-founder of Blackstone, said the deal took just three weeks to be agreed from the time China decided to invest.

“We did not propose that they buy a large share in our IPO. It was their idea,” he said. “I doubt that there is any government in the world that could have done it more efficiently or more professionally.”

The unprecedented move is the first purchase being made by a new, as yet unnamed arm of the Chinese Government that is being set up to use some $200 billion of its $1.2 trillion in foreign currency reserves - mainly in dollar bonds currently - to make overseas investments.

Lou Jiwei, head of the working group of the State Investment Company, and a former vice finance minister, said: “We are very pleased to be able to make the State Investment Company’s very first investment in such a well-respected firm as Blackstone.”

The move is a massive coup for Blackstone. It will now be a front-runner to manage more of the Chinese Government's money. It so far has no investments in China.

China said in March that it was setting up a vehicle to diversify part of its $1.2 trillion of foreign exchange reserves to improve returns on its portfolio.

Jin Renqing, the Finance Minister, has said that one of its models would be Singapore's state-owned Temasek Holdings, which invests in a broad range of industrial and financial assets at home and abroad, including Chinese state-owned banks.

Explore Economics

• Pre-Budget Report 2009

• Budget 2009

• World Economic Forum in Davos

• The Times MPC

Times Recommends

• ‘Lame duck’ fear for FSA as chief quits
• Storm over bailout of EU's most ailing economy
• Northern Rock to drop 100% savings guarantee