Walter Hutchens’ Blog

Bloomberg froths that Goldman Sachs’ ICBC stake is the best investment in the firm’s history, turning a $4 billion profit in six months.

Hyperbole, since 1) the shares are subject to a 3-year lockup 2) transfer even after the lockup expires will require PRC government approval and 3) the stake probably won’t be sold even once the lockup expires. But certainly it’s an attention-getting way to say that Goldman paid much less for its ICBC stake than the current market price of an equivalent number of publicly traded shares.

Other foreign strategic investors have also done well with their pre-IPO investments in PRC banks, according to the story (which ran in the IHT):

Bank of America earned more than $1 billion from an investment in China Construction Bank and Royal Bank of Scotland Group showed a $1 billion profit from Bank of China during the past one-and-a- half years.

Again, there is a material difference between “earned” in the sense of realized a bankable profit and “showed a [notional] profit.” That difference is being collapsed here.

Another way to spin it would be to say that thanks, in part, to the assurance provided by having foreign strategic investors involved, China’s communist party recently managed to raise nearly $40 billion dollars on international capital markets selling minority positions in government-controlled banks that two years ago analysts judged insolvent by international metrics.

I do hope China has set its financial system on the right path and that investors in it consequently benefit, even get the 暴利 (baoli, or outrageous profits) Bloomberg prematurely celebrates.

Certainly an enormous amount of effort has been put into reforming China’s financial system. I’ve previously expressed my sentiments about whether the listed banks are good investments over the mid to longer term, but, truthfully, I hope I’m wrong to be skeptical. Even though I’d be inclined to short sell shares in these banks, I’m “all in” in terms of how my life is invested in China’s rise, so yes I’d like to be proven too glum in my outlook.

The Bloomberg article careens over a few related but distinguishable topics concerning foreign financial firms and China:

1. deals where foreign firms invested in Chinese banks pre-IPO
2. underwriting work to help mainland China clients list overseas and
3. efforts to operate within the PRC mainland, as joint venture “securities companies” (providing either investment banking or brokerage services).

An additional important area, not mentioned in the article, is the direct participation by foreign banks in China’s domestic commercial banking sector, something to be broadly allowed after the end of this year, in accordance with the terms of China’s WTO accession.

One common theme is that in China all these areas substantially depend on government approvals and relations. This “special characteristic” of the PRC economy colors how all these things get done.

Blogged with Flock