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Goldman and Allianz betting on China bank(07/12/05)


   Shanghai Goldman Sachs and Allianz of Germany are in talks to pay more than $1 billion to acquire a stake in Industrial & Commercial Bank of China, the largest State-owned bank here, according to a person with close knowledge of the discussions.

    The talks come at a time when some of the biggest financial institutions are rushing into China to acquire large stakes in some of the big but troubled state-owned banks before planned initial public offerings in the next few years.

    "All the big financial institutions want a piece of the action," said Jack Huang, who oversees Greater China coverage for the U.S. law firm Jones Day from Taipei.

    "This is not necessarily a rational decision when you look at the numbers. But these institutions believe the government won't allow these banks to fail. They will step in to help them succeed."

    Bank of America said last month that it would pay US$3 billion for 9 percent of the No 3 lender, China Construction Bank, which is expected to offer shares to the public late this year. UBS said last month that it was considering investing up to $500 million in Bank of China, another state-owned giant.

    Several other major financial institutions have also acquired large stakes in Chinese banks in the past two years. HSBC bought a 19.9 percent stake in Bank of Communications, a smaller state-owned bank that went public this year. Temasek Holdings of Singapore, Newbridge Capital and ING Group also acquired large stakes in Chinese banks.

    It was unclear how large a stake in ICBC Goldman and Allianz were seeking. The negotiations were first reported this weekend by the South China Morning Post.

    Some large investment banks, like Goldman, are believed to be positioning themselves to help take the banks public in the next few years in deals that could result in hundreds of millions of dollars in investment banking fees.

    Citigroup was initially expected to help take China Construction Bank public, but bankers said that deal was now likely to be handled by Morgan Stanley and its Chinese joint venture partner CICC, or China International Capital Corp., after Citigroup passed on buying a stake. Bank of America bought a large stake instead.

    But the huge investments could be risky for some of the major financial institutions because the Chinese banking system has been struggling for years with massive debts, poor management and deep-rooted corruption.

    The Chinese government has consistently stepped in to help bail out the banks, including injecting US$45 billion in China Construction Bank and Bank of China in 2003.

    ICBC is the biggest bank in China, with nearly 400,000 employees, more than 100 million customers and about US$500 billion in assets. But it is also one of the most troubled. Analysts say the government has pressed large financial institutions to help clean up the banking system by taking sizable stakes in the big four state-owned banks, which also includes Agricultural Bank of China.

    For years, ICBC racked up bad loans tied to poorly operating state-owned enterprises. It has also been the subject of corruption investigations. In the past year, more than 368 bank employees were punished after an auditor found over US$800 million in irregularities at the bank. Some bank officials were arrested on charges of trying to steal about US$900 million. The bank has also been a victim: A private company used forged documents to borrow nearly US$900 million from the bank, according to state media.

    Goldman Sachs and Morgan Stanley - considered the two most powerful foreign investment banks in China - have each purchased a substantial amount of bad loans from Chinese financial institutions.

    In 2003, Goldman said it would form a joint venture with ICBC to deal with about US$1.2 billion worth of bad assets then held by the bank.

    Goldman, ICBC and J.P. Morgan have also agreed to lend about US$9 billion to China National Offshore Oil Corp, another state-owned giant, if it succeeds in its bid for the US oil company Unocal. Cnooc is now in a bidding war with Chevron.

    Indeed, Goldman has moved aggressively in recent years to strengthen its operations in China and solidify its ties to the government in the expectation that this country could some day be a source of billions of dollars in profit.

    Last year, the company agreed to donate US$67 million to the government to bail out a Chinese brokerage firm. Goldman then got approval to form a joint venture that could operate in China's domestic securities market. Altogether, Goldman's investment in the joint venture is expected to top US$200 million in the first few years.

    Goldman has ample money to invest. In April, it finished raising $8.5 billion for the Goldman Sachs Capital Partners V, one of the largest investment funds created this year. Goldman has a track record lately of buying stakes in financial services companies in Asia and several years later selling them at a big profit, having already done so with Ping An Insurance of China and Kookmin Bank in South Korea.



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