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Goldman Sachs cannot count on a second strike of lightning

Goldman Sachs Group Inc. is staging its next big act in China. The last time the global investment banking giant made a similarly big play was 15 years ago and it was highly rewarding. It was, as the Wall Street firm said then, a “historic investment.” This latest overture involves the same mainland partner but the conditions have changed. It may prove a lot less profitable. Tapping into Chinese money is, of course, part of an old Wall Street obsession. Where else can you lay your hands on a captive, multi-trillion dollar savings market in the post-pandemic world? Indeed, Goldman’s partner is China’s largest bank: Industrial and Commercial Bank of China (ICBC), with deposits of over $4 trillion. The US firm will own 51% of their wealth management joint venture, set up through both their asset management subsidiaries.

A partnership with ICBC alone opens up a distribution network of almost 9 million corporate and 680 million retail customers. Wealth management services were one of ICBC’s fastest-growing businesses in terms of fee and commission income last year. China’s regulators have blessed the venture because Beijing wants foreign capital.

It’s a little more complicated this time, though. The backdrop has changed drastically since 2006. China’s financial system has become much larger, murkier and more complex over the last 10 years. It is no longer full of novices looking for help and regulation just trying to keep up. And, the American investment bank will not have the first-mover advantage or the strategic hold it did a decade and a half ago.

In 2006, when Goldman took on about a 5% stake in ICBC, the Chinese bank was struggling, saddled with bad loans even a year after it had disposed of billions of yuan worth of such debts. It had been through a large-scale financial restructuring.

Goldman obtained unprecedented power to effect change. One of its senior executives got a seat on the Chinese institution’s board as it headed toward a multi-billion-dollar initial public offering. The American bank’s stake in ICBC sat alongside those of China’s finance ministry and other large state funds.

The Wall Street powerhouse got involved with a range of ICBC’s businesses. It jointly developed a yuan-structured product linked to foreign currency derivatives that helped the Chinese bank triple its wealth management product issuance. The American firm advised ICBC on disposal of bad loans, a lucrative opportunity at the time.

Goldman exited its investment in 2013, selling ICBC shares and netting almost four times its original stake. It had remained with ICBC longer than other foreign banks. If there is one thing Goldman Sachs knows how to do very well, it is timing a good trade.

However, going in now is not the same as that ‘historic’ rescue mission. China’s vast wealth management industry is in a state of flux as regulators attempt to manage its size and contours. It is not a bust-after-the-boom cycle type of thing, or a reconstruction process.

The sector’s unwieldy growth over the last decade left it deeply intertwined with underdeveloped parts of China’s financial markets and shadow banking. Regulatory arbitrage abounded. To capitalize on the demand for returns and to rake in the fees, banks extended high-yielding, credit-heavy offerings with layered assets. Risks grew and Beijing couldn’t get its arms around the free-wheeling industry; it had to resort on a whack-a-mole style crackdown.

Regulators have spent the last five years trying to clean out the morass. Heaps of troubled investment products are warehoused across financial institutions, in hopes of making them more legitimate one day. New rules—already long delayed—are due to come in this year. As part of those, products will have to be issued in a way they can be valued accurately on a net asset basis; and the old ones need to be converted to this. The likes of ICBC are still trying to figure out what to do with the trillions of yuan worth of problematic legacy products sitting on and off balance sheets—without taking severe hits.

Meanwhile, it’s getting crowded. Regulators have allowed more than 20 domestic banks to set up wealth management subsidiaries. Foreign financial institutions that are known for asset management, unlike Goldman, are also being let in, including the world’s largest, BlackRock Inc.

Back in 2006, ICBC got the international banking expertise it needed along with improved risk management and corporate governance. In spite of profiting from the alliance, the American bank did not lead to ICBC achieving anything close to the status of other Wall Street bulge bracket firms like Citigroup Inc, UBS Group AG, Morgan Stanley, JPMorgan Chase & Co or even Goldman itself. Not even close.

There may be no more history to be made.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia

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