Friday, September 13, 2013

Goldman and Bank of America Exiting China Bank Investments

I found it interesting to learn that Goldman Sachs has completely divested its investment in Industrial and Commercial Bank of China, the largest bank in China.  The divestment occurred earlier this year and was one of a series of stock sales by Goldman which now no longer holds any stock in the Bank, according to publicly available information.

Bank of America has also now exited its large position in another major Chinese bank, China Construction Bank.

The following article posits that this shows the lack of confidence large U.S. financial institutions have in the quality of Chinese banks and their loans.  This conclusion is among the factors cited in the article for a predicted major financial meltdown in China, which will affect the rest of the world.

I need to do a bit more digging on this one.  I could think of some regulatory reasons for the divestments (capital requirements, for one) but I suspect the cause is the obvious one:  a belief that the investments had run their course and a further run-up in Chinese banks was unlikely or, worse, a run-down was likely.

But let's walk one step further here.  The stocks sales by Goldman and BoA generated fairly large gains for the banks.  Unless the banks feared a run-down in the Chinese banks, why would you want to generate large gains in 2013?  Possibly because profits will not be as high this year as last year or next year.  Unfortunately, this is just food for thought because we don't know what Goldman and BoA really think about the likelihood of a Chinese bank disaster. 

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