Q&A with Blackstone CEO Stephen Schwarzman by Andy Serwer @FortuneMagazine February 5, 2014, 7:51 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons FORTUNE — A Year of the Horse Chinese New Year gala hosted by the China Arts Foundation brought together moguls from China and the United States in an event that was highlighted by an interview of one of the evening’s honorees, Blackstone CEO Stephen Schwarzman, by Fortune managing editor Andy Serwer. Other honorees included billionaire real estate developer and SOHO China CEO Zhang Xin, banker and philanthropist Steven Rockefeller Jr., and publisher and top media executive Wang Boming. The China Arts Foundation and its American chairperson, Angela Chen, facilitates classical music exchanges between China and the U.S., and Schwarzman spoke of the importance of culture in foreign affairs, as well as his Schwarzman Scholars — modeled on the Rhodes program — and why China is already ahead of the U.S. Here are excerpts: Stephen Schwarzman: My wife and I bought John D. Rockefeller Jr.’s apartment here in New York. I was talking with David [Rockefeller], and David said, “You know, my father lived there, and after my brothers moved out I spent my college years living at the apartment. In fact, I got engaged there. Would you mind if I came back and looked around?” Well, if you’re from China you may not know that if David Rockefeller asks you if he can come and visit your apartment, the answer is yes. And so David came over, and he was walking around, and we got to an area that we use as a dining room. It’s not that big. He said, “Oh, that’s where they kept the ceramics.” I said, “What do you mean?” He said, “This entire apartment was stuffed with ceramics. When I was growing up, they were almost more important than we were.” And I guess it was when his stepmother, he said, “I was in charge of settling the estate.” And he said, “I looked at all this ceramics, and I said this is the first thing I’m going to get rid of.” And this is the collection that is now the basis of the collection at the Metropolitan Museum of Art. It’s the Rockefeller collection that came from that apartment. FORTUNE: Thanks Steve, interesting connection between the Schwarzmans and the Rockefellers. Now can you tell us about the Schwarzman Scholars? The Schwarzman Scholars is a program that was designed with Tsinghua University. They asked me to do something in honor of their 100th anniversary. Tsinghua was founded with money that China owed as a result of the Boxer Rebellion. They were giving [reparations] money to the great powers, and the U.S. refused to accept it, basically saying “I don’t need the money, you take the money and start a school and send your kids who are graduates of the school to the United States.” So there’s a natural link between Tsinghua and the United States. And we had an involvement with our business, Blackstone, because the government of China had bought 9.9% of our stock in our IPO in 2007, which was the first investment by the government of China in a foreign business, in their equity, since World War II. I went on the board of their business school, and they asked me some help on a project in 2010, but there was something called the financial crisis. It wasn’t particularly opportune for me to be thinking about giving away money in 2010, I was actually more interested in making money at that time. So I sort of put them off. And then my wife and I were living in Paris and President Chen from Tsinghua called me up and said, “I’d like to fly to Paris and see if you really want to do this.” And I started thinking what would I want to do. He just wanted to do a student exchange. Good idea, but I was not particularly interested in just doing a student exchange. The problem I was interested in is, What happens if China continues growing at double or triple the rate of the developed world? What you find when you live in the United States, you live in the West, is that when somebody fails, it’s never their fault. They always like to blame somebody other than themselves for a failure. Right now we’re having a curious thing because for 30 years, the middle class, whether it’s in the United States or Europe, has not been able to increase its disposable income. So these people are getting frustrated because the costs of society are outrunning their ability to pay the bills. And they’re getting angry. At first, after the financial crisis, they blamed financial institutions and financial people. Then they just started blaming wealthy people. And all that blame hasn’t changed anything for them. My concern is they’re eventually going to blame somebody else, and the logical people for them to blame is China. The reason they’re going to blame China is China is the winner of the global game. They’re producing 10 million jobs a year. The West is producing almost nothing. Their income is going up. The income in the West is not going up. And once the West targets China, my experience is that the Chinese don’t like being attacked. They’re no different than anybody else, and they will react. And I have seen them react when they’re not happy, and it’s not pleasant. They don’t do it gently, they’re very tough. You could find yourself as a result of this, whether it’s in 10 years, 20 years, 40 years or 50 years, with real antagonism between the West and China — trade wars, economic problems, and potential military issues. You’ve already seen military tension between China and Japan, China and the Philippines. What I want to do is something that gets in the way of this natural progression. And what I came upon as an idea is using a Rhodes Scholarship-type format, recruiting the best and the brightest future leaders in the West and bringing them to China for a one-year program to get to know China so they can go back to their countries and try and interfere with this natural development of antagonism. We’re going to have 20% Chinese students, 45% from the United States, and 35% from the rest of the world. They’ll have the chance to meet the leaders of the country, which isn’t an everyday experience for foreign students. They’re going to have the chance to visit different areas in China, not just Beijing and Shanghai. And they’re going to have a mentor in their area of study from the real world. So if for example they’re interested in business, we’re trying to recruit somebody like Jack Ma. The student can go to Alibaba once a month and see how they run a great company, meet their families. And so in addition to just academic work, they’re going to have a real feel from the top levels of the society which they can bring back with them. We have gotten an amazing reception globally. We got President Xi to write some really long endorsement of this program. I was just dumbfounded. We had an announcement at the Great Hall on April 21st last year. We got President Obama to do, you know, sort of a greeting. Henry Kissinger was on video along with poor John Kerry, who had just gotten back after dealing with President Xi on this North Korean thing, where the leader of North Korea was going to lob some missiles someplace and we didn’t think it was such a good idea to maybe hit us. So that’s the basis of the program. I had no idea that there was all that back story to it. We’re also going to — I guess there’s more back story. — Going to be endowing this with $350 million, and so this will be the largest sort of not-for-profit gift to China as far as anybody has told me really since modern China started. [Applause] The end result, you hope, is greater understanding, cooperation, relationship-building between China and all nations. There’s probably nothing more important than that in the world going forward. Just another quick question or two. You have been someone who’s been interested in the arts and supporting arts going all the way back to when you were at Yale and studied ballet, which is a point I always love about you. [Laughter] And then of course later in life you were chairman of the Kennedy Center for Performing Arts in Washington, DC. And here we are at the China Arts Foundation Dinner, of course. So I wanted to ask you how is it that culture, music, and art can bridge nations and do relationship-building. Oh, jeez, anybody who listens to music realizes it’s universal. It’s not like opera, where there’s actually different languages. And I think performing arts just speaks to people and it helps bring them together. At the Kennedy Center we brought over 1,000 Chinese performing artists. It was the largest performing arts group brought to any country in the world. We had to get 1,000 individual visas, which wasn’t that easy because we couldn’t do it in a block. And we had all different kinds of performing artists. We had Chinese opera. We had the Chinese Philharmonic music. We had dancers. You want to talk about universality. They were playing music and they were dancing, and the Chinese group built equivalent of a human pyramid — five people at the bottom, four on top of them, three on top of them, two on top of them, one person on top. And the objective was for the entire dance group to jump all the way up in the air and go over these people. I was sitting next to the Minister of Culture from China, who didn’t speak a word of English, so it was a little difficult to communicate other than smiling. He did know how to smile, and apparently so did I. And my wife and I were sitting there, and she was right in back of me, the way the seats are in the boxes at the Kennedy Center. And I was sort of watching these people build the pyramid, and I said, “I can’t believe these dancers, or like acrobats, that they’re really going to be able to get over this.” The first person runs by, jumps up, smashes right into the pyramid. Everybody falls to the ground. [Laughter] And I’m trying to figure out — I’m not a diplomat, I’m just a business guy. And I’m sitting next to the Minister of Culture, and I look over to see what his reaction is. It’s nothing. It’s nothing. Now, if this was ice skating and you fell down, the music continues and you just continue your routine as if you didn’t fall, hoping the judged will not notice that you were all over the ice. But that’s not what they did. They basically stopped the music. The people got back in the pyramid, and they went back to do this again, which I thought was just as insane as the first time they were trying it. And I kept watching the Minister, who had no expression at all. And they put that music back on. That person approached the group and he bounced over, and it worked. And the performance went on. And at the end of the performance I said through the translator, who was right in back of us, to the Minister, I said, “That was really unusual. You didn’t seem at all upset.” I said, “If this was Russia, they would have executed these people.” [Laughter] And he said, “No, we are not upset.” He said, “In China, we aspire to greatness, and if we don’t get it right the first time, we’ll do it again. And if we don’t get it right the second time, we’ll do it again until we do the impossible.” And I left that performance and said, “Boy, I feel sorry for the United States.” [Laughter] China is an indomitable force, and they have a commitment for excellence. And I watched it just happen in the performing arts, and you can see it expressed in other ways. One quick last question: What is going to be the most important element or elements of the U.S.-China relationship 10 years from now? What is that going to look like? You’d have to ask Henry Kissinger, and I don’t know that Henry would know the answer, either, because there are just a lot of ways this relationship can evolve. The U.S. isn’t in a position to really create enormous problems, and China would be unwise to create them themselves. But at the moment this is in a very good place.