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Temasek, the investment arm of the Singapore government, has increased its bet on China’s banking industry by buying a slice of ICBC from Goldman Sachs at a time when sentiment about the sector is increasingly bearish.
The move by Temasek to increase its holding of ICBC to 1.3 per cent from virtually nothing will reduce a source of volatility from Goldman Sachs’ financial statements and allows the US bank to take profits on a lucrative investment as part of the trade-off.
In the third quarter of last year, a mark to market paper loss of $1bn on the firm’s stake in the big Chinese bank was enough to plunge Goldman’s Asian operations into the red. Following the deal, Goldman holds a 1.24 per cent total stake in the bank.
Goldman originally bought a 4.9 per cent stake in ICBC for $2.58bn in January 2006, before the bank went public. The investment was divided between Goldman funds under its private equity arm, Goldman’s own balance sheet, Goldman’s executives and Goldman clients.
Since that time, there have been clashes between those who have wanted to hold on to the stake and those who thought the stake had too great an impact on Goldman’s performance, according to people familiar with the matter. Goldman reports first-quarter earnings on Tuesday.
Beijing has viewed with dismay the speed with which supposedly long-term strategic investors such as Bank of America and Royal Bank of Scotland flipped their shares in the big Chinese banks in the wake of the global financial crisis. By selling to Temasek, Goldman hopes to minimise Beijing’s ire.
The last time Goldman sold a chunk of ICBC, in November last year, it sold to the market. “A single quality buyer like Temasek lessens the political problem,” said one person involved in the sale. “China does not like it when big stakes are sold to the market.”
The initiative by Temasek will be welcomed by Beijing at a time when sentiment about the Chinese banking industry has become bearish because banks are considered proxies for economic growth and growth in China is slowing. First-quarter gross domestic product came in at 8.1 per cent and Beijing has said it expects growth for the year to be just 7.5 per cent.
Temasek, with a portfolio of more than $150bn as of March 31 2011, now holds stakes in three of the big four listed Chinese banks, balancing its long term strategic commitment to the sector with opportunistic trading. In July, for example, Temasek made HK$9bn by selling shares of China Construction Bank at a 43 per cent premium to where it bought them in November 2010. It also sold some Bank of China shares at the same time and then bought some shares back just weeks later at a discount to the price at which it sold.
Last year, Temasek had a great year, in part because of such opportunistic moves. Since it sold its Bank of America shares in February 2009 at the market trough, it has moved a long way to restore its sullied image as a savvy investor. Its strategy of placing broad bets on the financial sector in developing markets while staying away from the sector in developed markets looks especially smart. It is looking to broaden those exposures; it recently bought a stake in a Mexican bank, for example, and is seeking investments beyond banks in the financial sector in China.