Everyone is buzzing over word that Goldman Sachs (NYSE: GS) will sell down nearly half of its remaining stake in ICBC (HKEx: 1398; Shanghai: 601398), the world’s largest bank by market cap, with analysts saying Goldman will net a tidy return on this investment made over six years ago before ICBC’s mega-IPO. (English article) But in my view they’re missing the point, as this sale is less a sign of satisfaction and more one of concern, as China’s banks stand on the cusp of a meltdown that could see their bad assets balloon and their share prices tumble in the next 2 years. That concern could easily snowball in the months ahead if China’s big banks really start to see their bad loans jump, leading Goldman to offload its entire remaining stake and perhaps even prompting American Express (NYSE: AXP), one of the banks’ last remaining major western investors, to dump its own ICBC holdings as well. Let’s take a look at the news first, which has western media reporting that Goldman is raising $2.5 billion by selling about 40 percent of its current ICBC holdings to Temasek, the Singaporean sovereign wealth fund. Goldman is selling the stake for about 3 percent less than its publicly traded price before the news broke, representing a fairly modest discount all things considered. This latest sale comes just 5 months after Goldman sold down another $1.5 billion worth of ICBC stock late last year. At around the same time, Bank of America (NYSE: BAC) also sold a its remaining stake in China Construction Bank (HKEx: 939; Shanghai: 601939), as it completely unloaded its 10 percent of the Hong Kong-listed shares of China’s second largest lender over the course of last year. Citigroup (NYSE: C) joined the exodus last month, when it also sold off its long-held stake in a smaller lender, Pudong Development Bank (Shanghai: 600000). Other major western banks that previously unloaded similar major investments in Chinese banks have included Royal Bank of Scotland (London: RBS) and UBS. While analysts have been pointing out that Goldman and Bank of America both need to raise their capital to meet stricter requirements imposed after the global financial crisis, the recent sales by these 2 US giants were undoubtedly also driven by fear that their China investments could rapidly plunge in value if a looming crisis for China’s banks ever materializes. China’s major lenders all survived the global financial crisis with little or no damage, mostly because all were prohibited from investing in the toxic global assets that caused the crisis in the first place. But Beijing sowed the seeds of its own financial meltdown in 2009 by ordering its banks to embark on their own lending binge as part of its 4 trillion yuan stimulus plan to prop up the Chinese economy at the height of the global turmoil. Now many of those loans — especially ones to local governments for dubious infrastructure projects — are showing signs of souring, prompting Beijing to consider a steady stream of measures to delay the inevitable wave of defaults. Worries about a looming crisis weighed heavily last year, with shares of most Chinese lenders falling during even as major global indexes rose. A rally for Chinese bank stocks early this year was most likely behind Goldman’s decision to sell now, as it sought to lock in some gains before the sector starts to sink again. Such a new sell-off has indeed already started to happen, and could accelerate in the weeks ahead as the Chinese banks start to release their first-quarter earnings results and outlook by the end of this month. If the reports show any signs of weakness, which seems likely, look for the downward share pressure to accelerate, and for Goldman and possibly even American Express to quickly consider selling the remainder of their ICBC holdings to lock in gains while they can.
Bottom line: Goldman’s latest reduction in its ICBC stake reflects growing concern about a looming China bank crisis, with more similar sales likely in the next 6 months.
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